Maximizing Bidding to Induce Higher Revenues in Charitable Auctions

Auctions are commonplace in fundraisers as a way to quickly generate revenue for an organization. Although substantial work has been done on the theory underpinning different auction models, there is still a lot to learn about donor behavior in the field and in the laboratory.

Recent work on bidding patterns and auction structures suggest that charities should use traditional first price auctions while encouraging jump-bidding and buyer attachment to the items they are auctioning.

Study 1 – Auction Formats for Charity Fundraising

Jeffrey Carpenter, Jessica Holmes, and Peter Hans Matthews conducted field experiments in 4 Vermont preschools to see which silent bid format, first price, second price or all-pay, raised the most money. For first and second price auctions, their differentiating characteristics, as their names suggest, are in which bid-price the highest bidder pays. The all-pay auction differs in that all bidders pay their bids regardless of if they win or lose the auction prize. Their experiment suggests that both the all-pay and second price formats are dominated by the first price auction.

Carpenter, Holmes, and Matthews saw consistent superiority of the first price auction which raised more money and demonstrated higher efficiency. While the standard definition of efficiency is of allocative interest, an alternative measure, based on the proportion of the retail value of the items that is recovered in the winning bid, might be more important to charities. On this measure the first price auction did very well at 98% compared to the second price and all-pay auctions which recovered 66% and 62% of the retail value, respectively. The average participation rates, defined as the number of potential bidders who actually submitted a positive bid on a given item, were also higher in the first price format (53%) as compared to the second price (39%) and the all-pay (14%) auctions. Interestingly, the researchers found a positive and significant relationship between revenue per item and retail value; a $1 increase in retail value generated about $1 in additional revenue for the fundraiser.

For charities who are considering fundraising with silent auctions the message is clear: first price auctions will help earn the most revenue while generating the most bang per buck.

Carpenter, Jeffrey, et al. 2008. Charity Auctions: A Field Experiment. The Economic Journal

Study 2 – Jumping and Sniping at Silent Auctions

Despite its popularity as a fundraiser for charities, very little research has been done on the bidding and revenue properties of the silent auction. The appeal of the silent auction stems from the low expense and ease with which it can be implemented—no professional auctioneers are required, for example—its scalability, low pressure atmosphere, familiar rules, and its complementarity with other event entertainment. However, silent auctions can generate less revenue if the other entertainment at a fundraising event provides a social distraction from bidding or if the "competitive arousal" that is characteristic of some live auctions is attenuated in silent auctions..

Jeffrey Carpenter, Jessica Holmes, and Peter Hans Matthews examine the consequences of two behaviors common in silent auctions, jump-bidding and sniping, in a laboratory experiment. Jumping occurs when participants increase their bids substantially more than the minimum increment. It may be indicative of attempts to signal high private valuations and/or intimidate others, or may be the result of impatient bidders who attempt to “telescope time.” In contrast, sniping occurs in a silent auction when bidders wait until the final seconds to write down their first bid. To the extent that costly bidding wars are avoided, sniping may suppress revenues.

The researchers’ were able to separate these two effects by constructing one treatment where each bid extended the bidding time by 30 seconds (eliminated sniping), and another where each bidder had randomly assigned private “exit” times from the auction (encouraged jumping). Their results suggest that deliberative jumping tends to increase revenue, while deliberative sniping by experienced bidders tends to decrease it. In high revenue auctions, deliberative jumping resulted in revenues that were indistinguishable from the English auction. The difficulty in choosing how to end a silent auction, be it with a firm or soft end time, is that organizers will tend to get either both or neither of the two effects, not the optimal jumping without sniping. However, Carpenter, Holmes, and Matthews suggest that for high revenue auctions a commonly enforced end time promoting jumping may be a way for silent auctions to perform as well as their sometimes more entertaining but more expensive alternative, the English auction.

Carpenter, Jeffrey, et al. 2011. Jumping and sniping at the silents: Does it matter for charities? Journal of Public Economics.

Study 3 – Endowment Effect in Online Bidding

James R. Wolf, Hal R. Arkes, and Waleed A. Muhanna examine the effect of psychological ownership on bidding in online auctions and in the lab. The researchers use the term “pseudo-endowment effect” to denote the hypothesized increase in value caused by a person’s psychological—as opposed to actual—ownership of the item. Wolf, Arkes, and Muhanna examined 6,999 bids placed in 1088 eBay Motors passenger vehicle auctions over a 10 day window. They found evidence that the amount of time a bidder participated in the auction and the aggregated duration that a bidder was listed as the high bidder for that auction correlated significantly to re-bidding. Additionally, their data suggest that the pseudo-endowment effect is reduced with experience. Specifically, those bidders with more and higher eBay feedback ratings were less likely to re-bid.

To rule out the possibility of competitive or opponent effects in the auction, the researchers conducted a laboratory study where 60 subjects were seated at tables with mugs in front of them. They were instructed to examine the mugs for either 10 seconds or 30 seconds before noting the amount they would be willing to pay to purchase the mugs. In each treatment of 10 subjects, the 5 with the highest bid values were offered the opportunity to pay their bid for the mug by subtracting their bid value from their initial $10 participation fee. Both the value of the bids and the number of subjects who purchased the mugs using their participation fees was significantly higher in the 30 second treatment.

Both studies described above suggest that online sellers may be able to benefit from understanding the effect buyers’ attachment has on willingness to pay. For example, many online auction sites add to a bidder’s pre-factual feelings of ownership by prominently listing the name of the high bidder on the auction’s detail page. They also add to the loss experienced when a consumer is outbid by contacting the previous high bidder via email and alerting that person to the fact that he or she is no longer winning the auction.

James R. Wolf, Hal R. Arkes, and Waleed A. Muhanna, 2005. Is Overbidding in Online Auctions the Result of a Pseudo-Endowment Effect?

Practical Takeaways

There are many methods with which charities can conduct auctions, but recent research is highlighting specific practices which can help maximize revenue. By using first price auctions, encouraging jump-bidding with common end times, and encouraging feelings of ownership from the bidders, charities can hope to maximize their earnings within any one fundraising event.

As online auctions become more common, it is important to remember that prominently featuring the name of the highest bidder and contacting highest bidders if they are out outbid are ways to encourage re-bidding.

Also learn about Matching Gift Effects.

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We thank Amanda Armstrong, Research Assistant at The University of Wisconsin-Madison for her contribution to this article.