Q12. An antique dealer regularly buys... [FREE SOLUTION]

Chapter 13: Q12. (page 540)

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鈥攖he antique cannot be sold at a profit. Can you explain the difference in her success between the two sets of circumstances?

Short Answer

Expert verified

The main difference between the two situations is the nature of the people participating in the auctions. As the dealers bid in the first auction, the highest bid is lower than the market price, thus, providing room for resale. However, in the public auction, the highest bid implies that other buyers are uninterested in buying the object by paying such a high price, thus, leaving no room for resale at a profit.

Step by step solution

Step 1. Explaining the difference in the dealer’s success in the two situations

The main difference between the two situations is the nature of the people participating in the auctions. In any auction, the winner is the one who values the object the most. They are willing to pay the highest price for the object out of all the bidders.

When the antique dealer buys objects at hometown auctions, she is only bidding against other dealers. When she successfully obtains the object, she is the only seller of the object. She can, thus, resell it at a profit because the people are unaware of the true value of the antique and are unable to get it elsewhere.

Further, none of the dealers will bid a price for the product above the true value. Thus, even the highest bid will be lower than the product value so that the dealer can resell it at a profit.

When the antique dealer travels to a nearby town to bid in the auction with the public, she might be a victim of the winner鈥檚 curse and purchase the object at a price higher than the value. Also, in an auction with both dealers and buyers, if the dealer wins, it implies that none of the buyers can afford the high price of the object.

For example, if the dealer wins the public auction and buys an object for $1000, it implies that none of the buyers value the object at $1000. To obtain a profit, she must sell it at atleast $1001. However, as none of the buyers are willing to pay $1000, they will definitely not be willing to pay a greater price. Thus, she will not be able to resell it in that area.

However, if she chooses to sell the object in a town where the people do not have the facility to participate in such an auction, she can sell it for a profit as they will be unaware of the true price of the object.