Auctions cover a field so broad it surpasses our imagination. In a normal society, buying good items at low prices is realistically impossible.

Can you buy quality items at low prices in the auction market?

Finding a family home in the city has never been an easy process. For three months now, we’ve been touring houses every weekend through a brokerage firm, but the places we like are too expensive, and the ones with reasonable prices have critical flaws.
Buying a newly built house? Finding a suitable one is like ‘picking stars from the sky’. Even if you find one, the entire process—from transferring ownership to completing interior renovations—takes at least 2-3 years before you can move in. Buying an existing home is burdensome not only because of the price and taxes, but also because of the need for new interior renovations. While I was agonizing over this, an acquaintance recommended court auctions. They said that if you’re lucky enough to successfully purchase a high-quality property at a low price, you can get a great deal cheaply. Looking up court auction information online, I found there were many properties available and the starting prices seemed reasonable. But no matter how much I thought about it, I couldn’t grasp the concept of auctions. Why hold an auction when you could just set a price? Is it really possible to buy high-quality items at low prices in the auction market?

The purpose of an auction is to maximize the seller’s profit

Surely many people have come across information about court auctions online, but how many have actually participated? The auction winning method is very unfamiliar and hard to encounter in daily life. So, is it really possible to buy very high-quality items at low prices in the auction market?
Before discussing whether it’s possible to buy very high-quality items at low prices in the auction market, and how to do so, we must first properly understand ‘auctions’. An ‘auction’ is a physical transaction method where a professional auction company, entrusted by the owner, announces the auction item to bidders at a designated time and place according to established rules and regulations. Through open price competition, the auctioneer sells the item to the bidder who offers the highest price.
Here, we see that an auction is not about buyers purchasing high-quality items at low prices, but rather about deriving the value recognized by all potential buyers and selecting the highest bid. Its fundamental purpose is to maximize the seller’s profit by fully utilizing ‘consumer surplus’.
From the seller’s perspective, selling to the highest bidder is the only way to achieve maximum profit, and the auction reveals the highest price bidders are willing to pay for the item.
What types of goods are traded in the auction market? Items typically auctioned include public goods like car license plates, land, and development project proposals, as well as goods with dedicated enthusiast communities and difficult-to-price items like artworks. Public goods cannot be sold at market prices, and items with niche enthusiasts also cannot have their prices determined by the market.
Goods traded through auctions share several characteristics.

First, they possess differentiated private value

Goods sold widely in the market with standardized specifications generally hold a commonly recognized value. When universally acknowledged, their prices are set within a relatively open and transparent range. A cup noodle for $1, 10kg of rice for $30. These prices are all examples of that.
In contrast, for goods that are not widely sold, lack standardized specifications, or have a narrow sales target range, it is impossible to know their universally recognized value. Paintings, calligraphy, and artworks fall squarely into this category. Especially for goods possessing unique personal value, individuals often assign differing values to them.

Second, information asymmetry or uncertainty in auctions

What is information asymmetry? For instance, during an art auction, the seller may be reluctant to disclose the provenance or may be unaware of the piece’s history. Particularly with some antique artworks, the actual year of production can only be estimated, not precisely known. Even determining whether an item is genuine often relies solely on expert conjecture. This situation is precisely what we call ‘information asymmetry’. Because such information carries significant uncertainty, people form differing judgments about the item’s value.
It’s important to note that sellers may intentionally create or maintain information asymmetry during the auction process to achieve the highest possible valuation. A crucial point here is that information asymmetry can also exist among bidders. Sellers take various measures to prevent information sharing among bidders. Bidders, too, strive to gain an advantage in the competition and win the bid at the lowest possible cost, so they try their best to prevent their information, especially their psychological anchor or ‘anchor price,’ from being exposed to competitors.

Four Different Auction Formats

How does an auction proceed? Generally, there are four main formats for conducting a single-item auction:
The most common format starts at a Starting price, with bidders raising the price until the highest bidder wins. This is the ascending auction, starting low and increasing the price, also known as an ‘English auction’. In an ‘English auction’, the auctioneer announces the minimum price for the item. Bidders then compete by raising the price from the starting point. If no other bidder appears after the auctioneer calls out the highest bid three times, the auctioneer strikes the gavel to confirm the sale. The winning bid must exceed the ‘Reserved price’.
Additionally, there is a descending auction, also known as a ‘Dutch auction,’ which starts at a high price and decreases. In this method, the auctioneer announces the starting price and then calls out the price in descending order, starting from the highest bid. The first prospective buyer to respond secures the item. Here too, the winning bid must exceed the reserve price.

Reserve price: The minimum sale price for an item agreed upon between the auctioneer and the consignor; it is confidential by default.

While unfamiliar to the general public, the third method, well-known among experts, is the ‘First-price sealed-bid auction’. In this method, prospective buyers submit sealed bid forms to the auctioneer within a specified time. The auctioneer then verifies the bids and determines the winning bidder.
Compared to the previous two methods, the ‘First-price sealed-bid auction’ has two distinct features. First, it may involve other transaction conditions besides price. Second, it allows the choice between public or private bid opening. This method is often adopted for auctions involving large equipment, bulk inventory items, or government-seized property.
Finally, there is the ‘Second-price sealed-bid auction’ proposed by Vickrey. This method is fundamentally identical to the highest-price sealed-bid auction, with one key difference: the winning bidder pays not their own bid price, but the second-highest bid price.
At this point, you might be wondering:

“The winning bidder pays a lower amount than their own bid? Doesn’t that mean the winning bidder pays less? Isn’t the auction supposed to capture the buyer’s ‘consumer surplus’?”

There’s a bigger ‘catch’ here. At first glance, it seems advantageous for the winning bidder to pay less than their expected amount. However, from the bidder’s perspective, the bid price is merely a tool for participating in the auction. Since they don’t have to pay their bid price even if they win, they tend to submit a higher bid than their actual expected cost. After all, a low bid means failure to win.
If only one or two people think this way, it’s fortunate. But what happens if every bidder thinks this way? Everyone will submit a bid far exceeding their psychological ‘starting point,’ and the final winner will discover that even the second-highest bid far surpasses their own psychological ‘starting point.’

Beware the ‘Winner’s Curse’

While paying the second-highest bid might seem advantageous for the winning bidder, the intense competition among bidders ultimately forces the winner to pay far more than their psychological ‘starting point,’ leaving the auctioneer with greater profits.
Auctions are a kind of ‘game’. They are a game between buyers and sellers, and also a game between buyers themselves. The final winning bidder may have ultimately prevailed in the bidding war, but they soon realize they have fallen victim to a ‘curse’. This is precisely ‘the winner’s curse’.
According to economic theory, if all bidders are rational, the ‘winner’s curse’ should not occur. Therefore, in market mechanisms, the ‘winner’s curse’ is considered an anomaly. However, numerous subsequent studies and experiments have revealed that the ‘winner’s curse’ is a highly common phenomenon.
Why does the ‘winner’s curse’ inevitably occur? This ‘curse’ can only befall the person who wins the auction. The moment the auctioneer’s hammer falls with a ‘thud’, signaling the winning bid, the winner realizes the price paid for the item exceeds the value judgment of other prospective buyers. Regardless of their own value judgment, the instant they win, every winner is cursed to pay more money than necessary.
However, the ‘winner’s curse’ generally only occurs when an item of identical value to everyone is put up for auction. Why is that? Precisely because only a product with identical value to everyone—that is, common value—can have a bid price that exceeds its common value.
So then, what value does an item with different private value for each individual actually hold? In the market, there is no concept of paying more or less for an item lacking public value. One pays only the price they personally recognize in their mind—their own private value. This holds no significance in the market, and the ‘winner’s curse’ does not exist.
The ‘winner’s curse’ influences bidders’ offers and raises concerns about the auction market. Resolving this is the current challenge facing economists.

The Emergence of a New Auction Method in 2020

Paul R. Milgrom and Robert B. Wilson jointly won the 2020 Nobel Prize in Economics for inventing a new auction method. Paul Milgrom and Robert Wilson’s auction theory will soon be applied in real life.
In their 1982 paper “A Theory of Auctions and Competitive Bidding,” co-authored with Robert Weaver, Paul Milgrom established an analytical framework for handling information, prices, and auctioneer profits when valuations are correlated.
Observing real auctions, they found that bidders’ valuations are correlated: when one bidder values an item highly, other bidders’ valuations can easily rise as well.
This is why auctions are also called ‘Revelation games’. A prospective buyer’s bid price not only provides information about how they value the item but also reveals some of the information held by other prospective buyers. Consequently, a bidder’s profit depends on how thoroughly they can conceal their own information. If information is exposed during the auction process, bidders can predict each other’s bid prices, forcing them to bid higher amounts to secure the win. Conversely, auctioneers gain greater expected profits as bidders’ information becomes more shared.
In auction theory literature, Paul Milgrom defined this finding as the ‘linkage principle’. He applied this principle to analyze various popular auction formats.
In an ‘English auction’, the bid price of the first bidder to withdraw reveals their information about the item’s value. The auctioneer can link the Estimated price of all unsuccessful bidders to the auction price, achieving relatively high profits. In a ‘Second-price sealed-bid auction’, the auction price is linked only to the bidder who offered the second-highest amount among the estimated bids, resulting in relatively lower profits. In ‘Dutch auctions’ and ‘First-price sealed-bid auctions’, since there is no link between the prices, the auctioneer achieves the minimum expected profit.
Paul Milgrom’s findings have heightened the positive perception of the currently popular ‘English auction’. Notably, through his research on linked auctions, Paul Milgrom demonstrated the ‘winner’s curse’.
In auctions, the ‘winner’s curse’ manifests as concerns over information asymmetry, sometimes leading participants to abandon bidding altogether. The two economists recognized this as a critical issue requiring resolution in problem-solving and mechanism design, ultimately designing many groundbreaking systems.
At the ‘11th Caixin Summit’ held in late 2020, Paul Milgrom personally explained the most well-known auction method he had proposed to the U.S. Federal Communications Commission (FCC).
The telecommunications spectrum market is characterized by differing demands for licenses among all potential buyers. The value buyers assign to a license is uncertain and typically relates to other licenses they already hold.
For example, consider a bidder who has secured three-quarters of the spectrum licenses nationwide. When bidding for licenses in the remaining regions, they may have a stronger desire than a bidder who holds no licenses at all. Furthermore, strong substitution relationships often exist between different types of licenses. In other words, for some bidders, acquiring an Eastern license versus a Western license might make little difference.
In this situation, the existing auction system yields zero efficiency in the worst-case scenario. Suppose there is a substitution relationship between different licenses. When auctions for multiple licenses proceed sequentially, whether public or private, bidders contemplate whether to purchase the current item or wait for a later one, and what price the later item might command, once bidding begins on the first item. If they misjudge the estimated price, a buyer who undervalued the item will purchase the first auction item. This initial mistake can trigger a chain reaction, significantly impacting the entire auction.
Therefore, the most ideal auction allows buyers to observe all items before participating in bidding, freely bidding on one or multiple items. In this process, bidders can freely choose among substitutable items. This eliminates the need for bidders to guess item prices and establishes a unified transaction price among fully substitutable items.
Auctionomics, the global auction advisory firm founded by Paul Milgrom, provides auction design services to sellers and bidding advisory services to buyers. It has also been tasked with designing auction systems for the U.S. FCC.
Considering the characteristics of frequencies mentioned earlier, Paul Milgrom devised the ‘Simultaneous Multiple Round’ method.
In each auction round, bidders place bids for at least one frequency band they wish to purchase, keeping their bid amounts confidential. At the end of each round, only the highest bid for each frequency is disclosed. This highest bid determines the starting price for all frequencies in the next round. For example, the previous round’s highest bid becomes the starting price, and the price increases within a predetermined range, such as 5% or 10%.
After the next round begins, the previous round’s highest bid remains the starting price until it is superseded by a higher bid. If no higher bid appears, the auction ends. This new auction method is highly suitable for auctions of mutually substitutable usage licenses.
As prices rise during the auction, some bidders may switch targets and submit bids for currently auctioned licenses with relatively lower prices if someone offers a higher bid than their own submitted frequency bid. This creates a valid arbitrage opportunity between substitutable licenses. The higher the substitutability, the narrower the price gap between licenses.
The auction is conducted entirely online, with buyers nationwide participating on the same platform for three one-hour sessions daily. All proceedings are publicly accessible online, and final results are announced and archived to ensure fairness and transparency.
This meticulously designed auction method effectively prevented common issues like free-riding, collusion, and the winner’s curse, achieving tremendous success. Through the new auction system designed by Paul Milgrom, the FCC achieved its objectives and became an excellent case study for applying auction theory to real-world scenarios.
At the 2020 Caixin Summit, Paul Milgrom stated that auction theory transcends bidding and is used as a means of resource allocation and balancing, efficiently distributing other goods or services to the most needy consumers. Examples include the refrigeration requirements for vaccine combinations, kidney transplants, and cross-enrollment between universities.
To elaborate further, in the case of kidney transplants, not all kidneys are suitable for transplantation without conditions. So, how can transplant kidneys be matched most efficiently? Here, mathematical models can be used to measure compatibility. After comparing the physical and organ conditions of multiple individuals, auction theory is applied when disclosing this information.
Another example is vaccine distribution. Some vaccines require storage in ultra-low temperature facilities. They must be transported at ultra-low temperatures and administered under conditions with appropriate infrastructure, while ensuring fairness in release. Applying auction theory here allows for full disclosure of individual information and fair prioritization, enabling vaccination for everyone.

Studying Economics Through Auctions

Now that we understand what auctions are, it’s time to answer the question: “Is it possible to purchase very high-quality goods at low prices in an auction market?”
Most auction markets adopt the traditional ‘English auction’ format, not the new auction method devised by Paul Milgrom. Therefore, purchasing very high-quality goods at low prices in an auction market can be divided into the following three scenarios.

First, purchasing high-quality items at low prices purely by luck

Court auctions are a prime example of this. The reason is that there is often no way to verify the actual information about some items, leading to significant risk due to this uncertainty. If most people abandon bidding because of the risk, the probability of successful bidders acquiring high-quality items at low prices increases. However, this requires the underlying assumption that all uncertain risks can be completely avoided. This is precisely what it means to purchase a high-quality item at a low price through luck.

Second, purchasing a high-quality item at a low price based on information

Due to information asymmetry, those aiming to purchase a high-quality item at a low price can discover transaction information unknown to others. Consider a government land auction. Suppose a real estate company obtains insider information beforehand that the government plans to build a large park nearby and open a subway line. With others unaware of this information, wouldn’t it be obvious that this company will submit a bid higher than the market price and ultimately win the auction?

Third, purchasing high-quality items at low prices based on knowledge

Those possessing specialized knowledge unavailable to sellers or other bidders—such as expertise in appraising cultural and artistic artifacts—can acquire exceptional quality items at bargain prices. Renowned collectors leverage their superior appraisal skills to preemptively secure countless lesser-known antiques in the collector’s market. This is precisely purchasing high-quality items at low prices based on knowledge.

Is it possible to purchase high-quality items at low prices in court auction real estate as well? Calmly examine the inner workings of court auctions thoroughly and gather as much information as possible about the real estate you like. By possessing better information than others, accepting the psychological ‘base price’, and participating in the auction only within the range that doesn’t exceed your own psychological ‘base price’, you can eventually acquire a property you like at a low price and of very high quality after several attempts.
In fact, acquiring high-quality items at low prices extends beyond the auction market into broader market economics and can even develop into a specialized field.
Warren Buffett, often called the ‘Investment God,’ stated that ‘purchasing high-quality items at low prices is the most important principle in investing,’ and that ‘investing in undervalued blue-chip stocks and holding them long-term is the secret to becoming the ‘Investment God.’’
Transactions where one can acquire high-quality goods at low prices primarily occur when market information is opaque, undisclosed, and incomplete. Even if one accurately captures market opportunities and reaps substantial economic gains in the short term, if all members of society pursue buying high-quality goods at low prices and become obsessed with speculation, diligent workers will disappear.
This is why nations strive to enhance market standardization and transparency. As economies develop, the stability of market rules increases. The more normal a society is, the less feasible it becomes to purchase high-quality goods at low prices. Therefore, we must abandon the dream of acquiring such goods.