Question

An antique dealer regularly buys objects at hometown auctions whose bidders are limited to other dealers. Most of her successful bids turn out to be financially worthwhile because she is able to resell the antiques for a profit. On occasion, however, she travels to a nearby town to bid in an auction that is open to the public. She often finds that on the rare occasions in which she does bid successfully, she is disappointed the antique cannot be sold at a profit. Can you explain the difference in her success between the two sets of circumstances?

Short answer

The difference in the antique dealer's success between the two auction types is due to the participants involved. In hometown auctions, participants are also dealers (professionals), who are likely to bid up to a resellable price. In public auctions, bidders, often lacking extensive knowledge of antiques, might overestimate an item's value and bid beyond a profit-making resale price.

Step-by-step solution

Identify the Important Factors

The antique dealer has two different experiences with auctions. In hometown auctions, it's mentioned that only professionals participate which makes it a closed group thus the competition is relatively less. The participants have a good eye for quality and potential profit on the objects available for bidding, which might result in relatively lower bidding prices due to shared expertise.

Analyze the Hometown Auctions

In hometown auctions, the buyers are other antique dealers who, like her, also aim to resell the items for profit. This means that they are likely to bid only up to an amount that ensures they can make a turnaround. Also, being professionals, they are expected to have extensive knowledge about the market and the value of antiques. Hence, the objects are sold for a price where profit can be made.

Analyze the Public Auctions in the Nearby Town

In the auctions open to the public in a nearby town, consumers with possibly less knowledge about the value of antiques are more likely to overestimate and therefore over bid on items. Hence, winning bid ends up being higher than the resale value of the antique, making it tough for the dealer to sell them at a profit after her purchase.

Conclusion

The success of the antique dealer depends on the bidders in the auction. In auctions conducted exclusively among professionals, items are more likely to be purchased at a price where profit can be made upon reselling. However, in public auctions where the bidders may overestimate the value of the antiques, the purchased price is usually higher than the resale value, which eventually leaves no room for profit.