What is an auction? A definition and some types
Examples from Sotheby's, Christie's and Phillips
INCIPIT. A few days ago I was talking with a friend of mine (also here on substack with the newsletter Refactoring: let's have a look, my advice 😉). I was explaining to him the idea of Auctions Review and he just said "Oh well, I don't know exactly what is an auction and why it should be interesting learn about it. I mean, I have an idea but I think it's not that much".
"Ok" I thought "I should probably start from there!" So, in the next paragraphs I will tell you:
What an auction is and how it works
How many types exist
Which ones will be followed by Auctions Review
First of all: a definition and short classification
In order to be sure we know what an auction really is, it's important to have a clear definition of it. Online there are different definitions, but the meaning is always quite the same. We can say, in general, that an auction is a
Process of buying and selling through bidding that ends with the sale of the asset to the highest bidder
According to how the auction mechanism works, there are 4 main types of auctions:
English a.
upward competition in price, in the case of selling, or downward competition in the case of buying.
Dutch a.
the auctioneer starts with a very high price and begins to announce gradually lower prices until one of the participants stops the descent.
First Price Sealed Bid a.
the participants submit bids individually to the auctioneer, who opens them publicly, within a set deadline: whoever has submitted the best price (the highest in sales; the lowest in procurements) wins the bidding.
Second Price Sealed Bid a. (also known as Vickrey auction)
the participants submit their bids in secret. Whoever bids the highest price wins the bidding, but pays a price equal to the second highest bid price.
The first two of them are called dynamic tenders, that is, those in which individual bids are submitted in public. In contrast, sealed envelope auctions to the best price and second-best price are secret-bidding contests.
This classification distinguishes auctions according to their bidding mechanisms. On the other hand, if we classify auctions based on what is sold or how they run, we define other types, e.g.:
(based on topic) art auction, design auction, luxury auction etc.
(based on management system) saleroom auction, online auction etc.
The basic structure of every auction is always the same. There are:
the auctioneer
the sellers
the bidders
the goods to be sold
the auction house (or legal entities with similar powers)
The mechanism is simple: someone wants to sell something (that doesn’t have a specific price) at the highest possible bid. Some others are interested in buying. Those people represent supply and demand. The role of the auction is to match supply with demand and the auctioneer is the person who handles the process. The auction house acts as guarantor for the transition and earns a percentage from the sale of the items. The final purpose of the auction is always the same: to maximize profit.
Is it really that fascinating? The market speaks for itself 🤑
Short summary of 2021 for Sotheby’s, Christie’s, and Phillips
The year 2021 was a very great year for auction houses, which in art sales alone increased their revenues by 60 percent. The three most renowned of our day Sotheby's, Christie's, and Phillips fought the crisis caused by the pandemic with a new auction format called phygital, which hybridizes people's physical presence with a remote online presence. This method conveyed confidence to the market and produced amazing results.
Sotheby's accrued turnover in 2021 is $7.3 billion - the highest ever recorded in the history of the New Bond Street auction house. This success is due in large part to private sales that yielded about $1.3 billion.
Christie's stops just below, with total sales of $7.1 billion: the highest result in the last five years for this auction house.
Phillips reaches the highest ceiling in its history, surpassing its 2019 sales by more than 32 percent. The final result was $1.2 billion.
The English Auction: the Sotheby’s, Christie’s, and Phillips model
The core of Auctions Review
The famous Sotheby's, Christie's and Phillips adopt precisely the English auction method. This means that competitors publicly submit their bids, which then become immediately known to all participants. Participants can immediately reply to their opponents with a higher bid. A price proposal is accepted only if it improves on the last bid. After a preset time frame, if there are no further bids, the auction ends. The winner is whoever submitted the last bid.
This kind of auction is surely the most popular and spectacular. It is not uncommon to hear about auctions that sell multimillionaire items. More often, TV news reports the results of fine art auctions or celebrities auctions, because they have a resonance on the public. Anyway, auction houses generally have many departments. Sotheby's, e.g., has 71 departments and only one specific for design: 20th Century Design; Christie's has 60 departments, and three of them are focused on design: American Furniture & Decorative Arts, Design, and European Furniture & Works of Art; Phillips has 7 departments and one of them is Design.
Of course, there are lots of auction houses around the world, with many interesting and valuable categories, but this newsletter wants to focus on design objects and furnishings.
Design auctions: just a little example
The last auction of 20th Century Design departments of Sotheby's was the Design Edit Milan that reached €1,007,118 overgoing the first best estimated of €800,000.
«The results of Sotheby's Italy's first Design sale testify to the significant demand from collectors, both locally and internationally, for previously unseen works [...] These successes again confirm the market's appreciation for rare and high-quality Italian Design, presented to the world from Milan, a city that has been at the center of its development».
Elena Cecchi, director of the Design Department at Sotheby's in London
The reason for the success? A major catalog that gathered the biggest names in Italian design, from Gio Ponti to Lucio Fontana to Osvaldo Borsani and many others.
The lot beaten at the highest price was Lucio Fontana's rare ceiling lamp that totaled €138,600 (estimated between 50,000-80,000). Gio Ponti surpasses many estimates: his Proteo table lamp totaled €107,100 (estimated between 10,000-15,000); his corner sofas sold for €40,320 (estimated between 12,000-16,000), and a pair of dressers fetched €37,800 (estimated between 15,000-20,000). Osvaldo Borsani also fared better than predicted. Pieces he created between 1949 and 1950 for a private residence doubled their estimated value: the inlaid Candoglia marble oval table sold for €32,760 (estimate 10,000-15,000); the mahogany bar cabinet for €23,940 (estimate 12,000-18,000), and the console and mirror set for €25,200 (estimate 10,000-12,000).
In the next months, other auctions like that one will take place. If you want to find out which one to follow and how to participate, subscribe now and wait for the post of the next week. 😉 Also, I will deeply explain how auctions work if you are a seller, or a bidder.