This assumes you plan to resell the item. If there arenât really comparable goods and you plan to keep the item for the foreseeable future, then shouldnât the only value that matters be the subjective value to the buyer.
Economically speaking, auctions are the optimal solution for one of a kind items.
In 1983, Max Bazerman and William Samuelson asked M.B.A. students in 12 Boston University microeconomics classes to estimate the value of each of four commodities: jars containing 800 pennies, 160 nickels, 200 large paper clips each worth 4 cents, and 400 small paper clips each worth 2 cents. Thus each jar had a value of $8.00, though the students didnât know this. They asked the students to bid on the value of each commodity. The student whose bid came closest to the true value in each auction would win a $2 prize.
With just one large paperclip, you can buy a house - eventually.
Well it depends on the auction, who is there, and what they have.
You can get GREAT deals on items if no one else knows the value or is interested in the item. Try to sell a rare book at an auction for Beanie Babies and you wonât get a great price.
Conversely if you have an auction that is specific to a collecting field, like art, guns, comic books, etc, and you have really rare, good quality stuff, you should get a good group of interested buyers and you should get a premium for what you are trying to sell.
I once won an argument with a wall street banker-type by pointing out that his entire industry, and much of this economy, is based on the notion that one person is willing to pay more than everyone else thinks something is worth; that in essence everything sold at auction is demonstrably overpriced because the person who bought it couldnât sell it for what they paid. Banker types like to think of an auction and the capitalist system that it is the basis of as the most rational and efficient system. When you point out that the result is that everything is actually inherently worth less than what was paid for it, and that only an irrational person would do that, their brains tend to brainglitch. At least the not-so-quick ones, anyway.
Key word being âat riskâ of overpaying. I would hesitate to read too much into this about markets and price signaling. If people do their research, avoid emotional bidding, and are willing to walk away, then that risk is practically non-existant.
I would argue that the sentence Mark picked out to summarize the article: âThe winner of an auction tends to be one of those who form the highest estimate of an itemâs value â and hence one of those most at risk of overpaying.â is not actually supported by what the authorâs themselves state about their findings, bolding mine:
In other words, if your focus is on winning the bidding, then yes, you are in sever danger of overpaying. If you formulate your bid and walk away if it isnât going to win, then you are part of the signal, not the noise.
This all depends upon a lot of generalities. I agree with waetherman that there are psychological problems with capitalist models of supply/demand games. Would-be sellers consider it obviously worth their while to inflate the perceived value of things, while would-be buyers strive to reduce this perceived value. Rather than coming down to the item or service in question, it becomes a matter of relative convenience.
My most shrewd auction buys have been lots where supply outstrips demand, despite practical value. Or when people are unaware or not clear what they are offering for sale. Those who auction many things can get lazy with testing or explaining. Some of my best deals ever have been eBay auctions where the seller simply mis-spelled what they had! So nobody else knew about it.
Stupid people should be parted from their money and auctions are a god way to do this. 
I once sold some (clearly indicated as) used disk cartridges once popular. I write solid, clear descriptions and use a decent low starting price when I sell stuff. This pile of used items got bid up past the price of buying them new on the open market (You could buy them from Office Depot and get free delivery for less then the winner paid for my used ones plus he paid shipping.)
There was no deception or even âpumping up the valueâ of the items as they were quite utilitarian, still in production and not at all rare. I still stand in awe of the idea of making money off used stuff by selling it for more than the price of it new with people fighting to pay that price. Iâm too moral (by my standards) to make a living that way but I wonât refuse the money if otherwise rational people want to do foolish things.
On the flip side, you can do well with buying collectables if you are careful and do not get overly excited. I once wanted to get a complete set of a particular comic book series that had run for a couple of years (Sisterhood of Steel, one of the few comics to have women mercenaries actually acting like women and real fighters. No chain mail bikinis allowed and they werenât all sex kittens with swords)
A set came out on an auction site and I bid and it went into the stratosphere. I waited. It sold for so much, that people started digging sets out of the closet. Several sets sold for similar annoying prices, then more sets came out. I bought mine for just a bit over the initial, quite low, starting price. The market had become saturated and the over-eager, hysterical buyers had all gone home satisfied to have a smoke and a drink and enjoy their post-coital purchase glow. ;0 Though Iâve always wondered how the person who paid a couple of hundred dollars for something I bought for about $25 two weeks later felt (Comics were in the same condition so no variables there.).
Thatâs interesting because thatâs not at all how a stock exchange works. Itâs really not an auction.
Also, yourâe assuming the Efficient Market Hypothesis, which is disproved on a regular basis and not really believed by anybody except finance majors.
Maybe those are both details that would make a banker go into one of those paradox-feedback loops.
Iâve seen some mis-spelled ebay auctions end at higher than the going rate, though. I suspect that several people all thought they were going to get a bargain, then got emotionally invested in âwinningâ.
Improvements in ebayâs search algorithms have taken some of the fun out of it, too.
Used to be, misspellings were how you could also get pretty great deals.
You can still get some great deals, if you search carefully. I used to acquire miscellaneous old gaming gear by looking for very recently listed buy-it-now auctions described as a âlotâ, sorted high to low + shipping.
Thereâs an uncommon type of seller that just has a bunch of crap that they donât care much about how much they get for it, it just needs to go (housecleaning, recovering hoarder, breakup, etc.). If you have the time to invest sometimes buying and reselling the undesirable crap in the lots, you can get some quite good deals.
Edit: The Buy it Now + Sort high to low plus shipping + Newly Listed is still a great way to take advantage of less savvy sellers, even if youâre not picking up lots of things. Itâs also quicker than bidding, by a lot. If your item is sort-of rare, you can still take advantage of this by just creating a search that emails you with new listings matching that criteria. Eventually, something might turn up if youâre not in a hurry.
In short: Buy it now is the best feature of Ebay.
On the theory that any opportunity to post an old Lore comic is necessarily a good opportunity, I present
If you are willing to pay the price for an item you want, you paid the right price. Everything else is just a terrible joke.
SoâŚhow come stock markets are like auctions?
I canât remember the exact provenance but I recall reading some quote from some eccentric Ăźber-rich guy who had just dropped an insane amount of money on a rare vintage sports car. A friend, having been told the price, protested that âno automobile is worth that much!â
The rich guy just looked his friend dead in the eye and said âit is now.â
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