How To Use An Auction In Your Next Negotiation

Negotiators have to know how to choose the best kind of auction
Negotiators have to know how to choose the best kind of auction
Image Credit: M C Morgan

We all know that there are a lot of different ways to resolve business negotiations. One way that is not used all that often but which might be of a great deal of value to you is use an auction as a part of a negotiation. Under the right circumstances, using an auction can harness the power of the free market to determine what a given item is really worth. However, just deciding to use an auction as a part of your next negotiation will not be enough. It turns out that you also have make a decision about what kind of auction you are going to want to use.

Using Auctions In Negotiations

There are many business negotiation examples involving auctions. You will have to weigh the pros and cons of selling an asset via either an auction or a negotiation and decide that an auction is the best choice. Once you’ve done this, there is another decision that has to be made. What kind of auction should you use? You need to realize that it depends in part on the type of asset you have. A common-value asset is one that all negotiators should ultimately value the same, though their current estimates will differ. In contrast, negotiators’ estimates of the worth of a private-value asset can be quite different. Most assets will have both common-value and private-value elements.

An example of this would be art dealers at an auction for a Monet painting. They would have a strong common-value element; they are all trying to guess how much the painting will fetch on resale. Meanwhile, a wealthy art collector at the same auction might covet the painting for their living room; in this case, though the resale value is relevant (since no one likes to overpay), it is not the primary consideration.

If you choose to use an auction in your next negotiation, how should you design your auction? If you choose to use a sealed-bid auction, typified by the procurement auction, bidders do not know who else is bidding or even how many bidders there are. Alternatively, in an open-bid auction, similar to those held at Sotheby’s or Christie’s, bidders are well aware of who else is bidding, though the waters get muddied when bidders use surrogates to preserve their anonymity.

Types Of Auctions

When an asset that is being negotiated has a strong common-value element, an open-bid auction is often more attractive to employ for the seller. Bidders can learn a lot from other bidders’ willingness to bid. An example of this would be if an oil wildcatter who owns an adjacent lease makes a high opening bid for a plot of land, other companies that might not be as well informed will feel comfortable bidding higher. Of course, if the wildcatter expected others to get a free ride on his expertise, he might choose to not participate in the auction. Why would anyone waste time figuring out the lease’s value, only to be outbid?

A sealed-bid auction would one way to secure his participation, but you need to realize that it would come at a cost. Sealed-bid auctions attract the experts but discourage those who may not be as well informed, whereas open-bid auctions attract the less knowledgeable but can drive away the experts. The right choice balances both of these competing factors.

Sometimes a good auctioneer can find ways to dispose of this tradeoff. Auction houses such as Sotheby’s and Christie’s employ experts who assess the condition, legitimacy, and value of each item and share then this information with all potential bidders. Thus, a bidder whose wealth far exceeds her or her knowledge can bid comfortably on a diamond necklace, knowing what the auction house thinks it is really worth. When auctioning off a common-value asset, particularly when bidders are not equally informed, the seller should take the time to provide detailed information about its worth.

What All Of This Means For You

As negotiators we all realize that every negotiation that we participate in is going to be different. In order to be able to reach the deal that we want with the other side, we need to be able to be open to new ways of going about conducting the auction. What this means is that we need to be open to considering using an auction in our next negotiation.

Just deciding that using an auction is the best way to go is not enough. Now you are going to have to go ahead and make another decision. What type of auction are you going to use? This will depend on what will be auctioned off – will it be a common value asset or a private-value asset? You have choices. You can use a sealed bid auction or an open-bid auction. You need to realize that different types of auctions attract different types of buyers.

Using an auction to reach a deal in a negotiation is a novel way to reach a deal. However, as a negotiator you need to realize that just deciding to conduct a negotiation is not enough. You will have to make additional decisions and these decisions are going to be based on who you want to participate in the auction. Understand what will be auctioned and who you want to bid on it. Making sure that you run the right type of auction can ensure that you get the deal that you’ve been looking for.

– Dr. Jim Anderson Blue Elephant Consulting –
Your Source For Real World Negotiating Skills™

Question For You: When you conduct an auction, do you think you should try to get as many people as possible to show up for it?

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What We’ll Be Talking About Next Time

Let’s face it, conflict is a part of every negotiation. Both sides simply don’t see eye-to-eye. When this happens in your next negotiation, what are you going to do? You have a lot of options: you can walk away, you can start to threaten the other side, etc. No matter what you end up doing, your goal is always going to be the same: you want to be able to reach a deal with them. In order to make this happen, you might want to try using principled negotiations.