Auction "buyer's premiums" - who do you think REALLY pays for them?

[MarkFeld]

Having worked for a major auction house and spoken with many consignors/ sellers, as well as buyers on the subject, I know a lot of people think that the "buyers' premium" comes out of the buyer's and not the seller's pocket.

 

Please raise your hand/let me know if you believe that. If you do, I will explain why, in almost every case, you're mistaken.

 

[123cents]

I, for one, would like to hear what you have to say on the matter.

[MBA101]

The price of the coin is the price of the coin. The buyer pays what he is willing to pay, fees be damned, and we all factor in the buyer's premium. So you are right, it is the seller who is not getting all that he could get, if he could in fact run his own auction. Then again, the seller is paying for a service to get the word out about his coin...

[rbrown4]

I am not familiar with the behind the scenes structure and assignments of this and other auction fees, but am most certainly interested in hearing.

 

Rey

[TomB]

It's a matter of semantics. The coin costs the buyer what it costs the buyer, no matter how the cost is parsed while the seller receives what the seller receives no matter what portion may or may not be witheld.

[chinook]

The seller pays.

[gmarguli]

Having worked for a major auction house and spoken with many consignors/ sellers, as well as buyers on the subject, I know a lot of people think that the "buyers' premium" comes out of the buyer's and not the seller's pocket.

 

The buyers premium does come out of the buyers pocket. There is zero doubt about that. I've participated in hundreds of auctions over the years and never once did the seller offer to pay out of pocket the buyers fee for me.

 

Now my bid might get reduced to reflect the buyers premium and therefore the seller ultimately gets less, but the buyers fee still originally comes out of my pocket.

[James_OldeTowne]

Ultimately, the auction house makes out like a bandit, so I'm not sure how much it matters just what you call this premium or that premium.

[IGWT]

To the extent that you view the price realized (hammer plus buyer's premium) as the fair market value of the coin, then the consignor is "paying" the buyer's premium. I don't know anyone who is willing to pay 15% more than the fair value of a coin just for the privilege of buying at auction. Consequently, part of the fair market value of the coin that would otherwise go to the seller goes to the auction house.

[conqueror]

I say both parties. I would like to hear what you have to say on who pays the premium.

[DC Dawg]

I have purchased from an auction but I have never sold through an auction (eBay not withstanding). I would be interested in understanding how this works!

 

Scott

[MikeKing]

the seller pays in that his/her coin is sold roughly at 15% less than what the retail market bears, unless of course, they get the auction firm to hand over 5% of the buyers fee, then the seller will lose only 10%, provided the seller pays no fee at all.

[AegisIII]

I know the answer is supposed to be "actually, the seller pays;" obviously it's not really the buyer as he just adjusts the amount he is willing to bid based on what the buyer's fee is.

 

But then I decided to see if I could work it out. Let me note that I have never consigned to auction during any period so I don't know from experience what any standard seller's fees would be. Anyway, I considered three scenarios. First, a 15% buyer's fee and no seller's fee. Next, 10% buyer's and 5% seller's. Next, 5% buyer's and 10% seller's. Finally, no buyer's and a 15% seller's.

 

The answer would seem to be that it would be the auction house which is effectively paying the buyer's fee. Under the scenarios listed, the house gets a smaller cut as the buyer's fee increases and the seller's fee decreases, while the seller gets more money. Perhaps this makes sense, as the auction house are competing for consignors and this gives them more consignors; make up in volume what you might "lose" from lowering your seller's fee.

 

(I should also note that this was just using two examples, a bidder who wants to spend a maximum of either $1150 or $1200, bid increments of $50 with only on-increment bids, and actually bidding whatever increment lands him closest to his maximum from either side.)

[MarkFeld]

Before I go into a more detailed post on this topic.....

 

If you were going to consign to an auction, which of the commission deals below would you opt for?

 

Choice A:

Auction house charges no buyer's premium and a 12% commission to the seller.

 

Scenario B:

Auction house charges 15% "buyer's premium" and 0% commission to the seller.

[gmarguli]

Before I go into a more detailed post on this topic.....

 

If you were going to consign to an auction, which of the commission deals below would you opt for?

 

Choice A:

Auction house charges no buyer's premium and a 12% commission to the seller.

 

Scenario B:

Auction house charges 15% "buyer's premium" and 0% commission to the seller.

 

Assuming the coin will sell for the same, I'd take A as the cost is 1.1% less to me.

 

However, I very well might pick B assuming that some buyers will bid higher not taking into account the buyers fee. If I'm wrong, I lose 1.1% more, but if not, may make a lot more.

[rbrown4]

Before I go into a more detailed post on this topic.....

 

If you were going to consign to an auction, which of the commission deals below would you opt for?

 

Choice A:

Auction house charges no buyer's premium and a 12% commission to the seller.

 

Scenario B:

Auction house charges 15% "buyer's premium" and 0% commission to the seller.

 

To me choosing A or B would depend on several qualifiers and/or conditions.

 

First of all would be the coin or coins itself and the overall market demand or value for such. Second would be the auction venue being considerd including, reputation, size, location, other coins within the same auction, as well as size of and type of bidding audience. It would also depend on what my personal expectations were regarding the coin(s) and how it would do in the auction.

 

I would think that the cost/effect of a commission is considered by both sellers and buyers differently on almost any occasion all depending on circumstances described above as well as a host of others.

 

In other words, for me it would be a case by case basis.

 

Rey

[MarkFeld]

Before I go into a more detailed post on this topic.....

 

If you were going to consign to an auction, which of the commission deals below would you opt for?

 

Choice A:

Auction house charges no buyer's premium and a 12% commission to the seller.

 

Scenario B:

Auction house charges 15% "buyer's premium" and 0% commission to the seller.

 

To me choosing A or B would depend on several qualifiers and/or conditions.

 

First of all would be the coin or coins itself and the overall market demand or value for such. Second would be the auction venue being considerd including, reputation, size, location, other coins within the same auction, as well as size of and type of bidding audience. It would also depend on what my personal expectations were regarding the coin(s) and how it would do in the auction.

 

I would think that the cost/effect of a commission is considered by both sellers and buyers differently on almost any occasion all depending on circumstances described above as well as a host of others.

 

In other words, for me it would be a case by case basis.

 

Rey

Rey, please consider all of those factors to be equal.

[rbrown4]

Given that all of those would be considered equal I would choose Scenario B. Reason is that I would think that psychologically in the long run, buyers would be more apt to somewhat either ignore or take into consideration less the buyer's premium if they truly want a coin that they are bidding on.

 

Rey

[jtryka]

I was under the impression that the seller got screwed both ways, i.e. the house keeps the buyers premium and then charges the seller fees on top of that. Of course that impression is probably why I've never consigned to a major auction house!

[michael]

The seller pays.

 

 

[michael]

as the buyer adjusts his bid accourdingly as the buyer knows he has to add the juice to his max bid

 

if i want to buy a coin and all i want to pay max is 1150

then i can only bid 1000 as with the juice it brings it up to 1150

 

so the seller pays and of course if the seller is not smart enough some minimum bids with zero buyback he might evren pay lots more and also again the seller might have to pay the auction company 5% or thereabouts to sell his coins extra over the buyers premium so the seller if he does not know the coin auction game too well might get his handed to him on a turkeys platter

[michael]

also auctions are usually collusionary and for every one consignor that makes a killing there are 1000 smucks/suckers/putzs that lose their rear ends

 

 

 

 

[PerryHall]

I was under the impression that the seller got screwed both ways, i.e. the house keeps the buyers premium and then charges the seller fees on top of that. Of course that impression is probably why I've never consigned to a major auction house!

 

Sir, you are absolutely correct.

[MikeKing]

I was under the impression that the seller got screwed both ways, i.e. the house keeps the buyers premium and then charges the seller fees on top of that. Of course that impression is probably why I've never consigned to a major auction house!

 

Sir, you are absolutely correct.

 

this is so true.

 

your *spoon* out of luck if you don't know how to negotiate with the auction firms, or have enough 'collateral' in your coins, to make a fair deal, if your the seller.

 

most auction firms loved by so many, are truly hostile when it comes to trying to get fair deal, since they're a business that must make as much money as possible, and like AT&T, when they were a monopoly, know they can get away with murder, if they're really big and competitive...they essentially have created a 'sort of' monopoly.

 

Anyway, I initially chose " 1 " because I felt Legend's auctions got good bids because of their policy of not having a buyer's fee. Which I think worked on their behalf, and I liked their auctions.

 

But then, if you negotiate successfully, " 2 " might be the better choice, but that 1 or 2% difference in the seller's pocket may not make enough of a difference to compensate for the psychological strategy of no buyer's fee..which may be a win win situation for all. So I'll go with choice number 1.

[MarkFeld]

Scenario A:

Auction house charges no buyer's premium and a 12% commission to the seller.

Bidder has viewed the coin and decided he will pay up to $1150 for it. He bids that amount and wins the coin at his maximum bid of $1150 hammer. Seller gets 88% of the $1150 hammer price or $1012. Auction house nets $138.

 

Scenario B:

Auction house charges 15% "buyer's premium" and (an apparent bargain rate of) 0% commission to the seller.

Bidder has viewed the coin and decided he will pay up to $1150 for it. Because he knows there is a 15% "buyer's premium", he bids $1000 hammer and wins the coin at his maximum bid of $1000. Seller gets 100% of the $1000 hammer price or $1000. Auction house nets $150.

 

In each scenario above, the winning bidder pays the same amount. The only differences are in what the auction house and the seller net.

 

While some of you would chose option A and others, option B, many sellers are taken in by the illusion of a 0% or very low "seller's commission", and are unaware of how the so-called "buyer's premium" almost always (yes, there are occasional exceptions) significantly impacts the hammer price upon which they are paid.

 

In 1980(?) I was working for an auction house, which, as other auction firms did back then, charged the typical seller's commission. A major competitor introduced the "buyer's premium" along with a lower seller's commission. Sellers would net virtually identical amounts based upon the two commission structures, but it was impossible to make most potential consignors understand that and many opted for the lower seller's commission. Eventually we were forced to play the game and switch to a commission structure featuring a lower seller's commission along with a buyer's premium.

 

also auctions are usually collusionary and for every one consignor that makes a killing there are 1000 smucks/suckers/putzs that lose their rear ends

A gross exaggeration on both counts.

[mark]

Mark:

 

Whenever I read these "who pays the buyer's premium" or "who pays the seller's premium" threads, I am left to wonder if anyone has ever taken a beginning microeconomics class. In any mainstream microeconomics class--such as the one I teach--the students learn that this sort of "tax" is, in general, split between the buyers and the sellers.

 

The numeric case you worked out, Mark, is one of the extreme cases where the sellers pay the entire tax because it's a case with "perfectly elastic" demand--the buyers will pay exactly so much for a coin and no more. In your example, competition amongst the buyers will force the price to $1,150 if no premium is charged, so buyers pay $1,150 with no premium. If the price was ever less than $1,150 more buyers would bid the price up to $1,150 and no higher. The price buyers will pay is effectively "pegged" at $1,150. So, when the demand is perfectly elastic, then precisely as you worked out the sellers pay the entire tax (or premium) in the form of lower receipts and the buyers pay none of the premium--they were willing to pay $1,150 without any sort of premium and they pay exactly $1,150 with both types of premiums.

 

Now take another extreme case, one with perfectly elastic supply. In particular, suppose that sellers will sell a coin as long as they receive $1,000 for it. If there is no premium, competition among the sellers insures that the coin sells so that the sellers receive $1,000; if the price the sellers received was greater than $1,000 more of the coins would be offered for sale and the price would fall to $1,000. In this case, the price the suppliers receive is effective "pegged" at $1,000. (Just as in your case, competition among the buyers "pegged" the price they would pay at $1,150.) Now suppose there is a premium. Sellers will put a reserve on the coin so that they receive (at least) $1,000. Let's use the two premiums you used in your question. In the case of the 15% buyer's premimum, the seller places a $1,000 reserve on the coin. In the case of the 12% seller's premium the seller places a reserve of $1,136.36 on the coin. The key insight is that competition among the sellers insures that the coin STILL sells so that the sellers receive $1,000; if the price the sellers received was greater than $1,000 more of the coins would be offered for sale and the price the buyers pay would fall. So, with the 15% buyer's premimum, the coin auctions for a hammer price of $1,000 and the buyer pays $1,150 with the juice. The seller receives $1,000 (the reserved, "pegged price") and the buyer pays the entire $150 difference above the no-premium price of $1,000. With the 12% seller's premium, the coin auctions for a hammer price of $1,136.36. The seller receives $1,136.36-$136.36 ($136.36 is the 12% seller's premium) = $1,000 (again the "pegged price"). Once more the buyer pays the entire difference of $136.36 above the no-premium price of $1,000. In this extreme case, and contrary to your example, the sellers pay NONE of the premium and the buyers pay ALL of the premium. Plus the buyers pay all of the premium regardless of whether the premium was classifed as a seller's premium or a buyer's premium.

 

More generally, when some buyers are willing to pay more than other buyers and some sellers are willing to sell only if they receive a higher price than other sellers, the premium is divided between the buyers and the sellers. BUT the division does NOT depend on whether the premium is 100% a buyer's premium or 100% a seller's premium or some other split; the actual division depends on the elasticities of the demand and the supply.

 

Finally, assuming as some posters did that buyers are effectively stupid and ignore any premium when they bid seems bizzare--why not assume sellers are stupid and ignore any premium when they set reserves or consign their coins? Frankly, assuming either buyers or sellers are stupid does not seem to me to capture reality in most cases--though it may in a few.

 

Incidentally the same sort of analysis I sketched above is used to determine the tax incidence of the Social Security tax (who actually pays the tax--the workers or the firms?), the incidence of the sales tax (who pays--customers or sellers?), the incidence of the income tax (who pays--workers or firms?) and so forth.

 

Mark

[wayneherndon]

Most of the time, it comes out of the seller's pocket. I am particularly anal about figuring in all costs (juice, shipping, etc.) and deducting that from my maximum bid.

 

However, not everyone works that way. I've seen people who have a number in their mind and haven't taken into account the buyer's fee, sales tax, shipping, etc.

 

In general, I think more coin auction participants are of the former type than the latter, though.

 

WH

[MarkFeld]

Mark:

 

Whenever I read these "who pays the buyer's premium" or "who pays the seller's premium" threads, I am left to wonder if anyone has ever taken a beginning microeconomics class. In any mainstream microeconomics class--such as the one I teach--the students learn that this sort of "tax" is, in general, split between the buyers and the sellers.

 

The numeric case you worked out, Mark, is one of the extreme cases where the sellers pay the entire tax because it's a case with "perfectly elastic" demand--the buyers will pay exactly so much for a coin and no more. In your example, competition amongst the buyers will force the price to $1,150 if no premium is charged, so buyers pay $1,150 with no premium. If the price was ever less than $1,150 more buyers would bid the price up to $1,150 and no higher. The price buyers will pay is effectively "pegged" at $1,150. So, when the demand is perfectly elastic, then precisely as you worked out the sellers pay the entire tax (or premium) in the form of lower receipts and the buyers pay none of the premium--they were willing to pay $1,150 without any sort of premium and they pay exactly $1,150 with both types of premiums.

 

Now take another extreme case, one with perfectly elastic supply. In particular, suppose that sellers will sell a coin as long as they receive $1,000 for it. If there is no premium, competition among the sellers insures that the coin sells so that the sellers receive $1,000; if the price the sellers received was greater than $1,000 more of the coins would be offered for sale and the price would fall to $1,000. In this case, the price the suppliers receive is effective "pegged" at $1,000. (Just as in your case, competition among the buyers "pegged" the price they would pay at $1,150.) Now suppose there is a premium. Sellers will put a reserve on the coin so that they receive (at least) $1,000. Let's use the two premiums you used in your question. In the case of the 15% buyer's premimum, the seller places a $1,000 reserve on the coin. In the case of the 12% seller's premium the seller places a reserve of $1,136.36 on the coin. The key insight is that competition among the sellers insures that the coin STILL sells so that the sellers receive $1,000; if the price the sellers received was greater than $1,000 more of the coins would be offered for sale and the price the buyers pay would fall. So, with the 15% buyer's premimum, the coin auctions for a hammer price of $1,000 and the buyer pays $1,150 with the juice. The seller receives $1,000 (the reserved, "pegged price") and the buyer pays the entire $150 difference above the no-premium price of $1,000. With the 12% seller's premium, the coin auctions for a hammer price of $1,136.36. The seller receives $1,136.36-$136.36 ($136.36 is the 12% seller's premium) = $1,000 (again the "pegged price"). Once more the buyer pays the entire difference of $136.36 above the no-premium price of $1,000. In this extreme case, and contrary to your example, the sellers pay NONE of the premium and the buyers pay ALL of the premium. Plus the buyers pay all of the premium regardless of whether the premium was classifed as a seller's premium or a buyer's premium.

 

More generally, when some buyers are willing to pay more than other buyers and some sellers are willing to sell only if they receive a higher price than other sellers, the premium is divided between the buyers and the sellers. BUT the division does NOT depend on whether the premium is 100% a buyer's premium or 100% a seller's premium or some other split; the actual division depends on the elasticities of the demand and the supply.

 

Finally, assuming as some posters did that buyers are effectively stupid and ignore any premium when they bid seems bizzare--why not assume sellers are stupid and ignore any premium when they set reserves or consign their coins? Frankly, assuming either buyers or sellers are stupid does not seem to me to capture reality in most cases--though it may in a few.

 

Incidentally the same sort of analysis I sketched above is used to determine the tax incidence of the Social Security tax (who actually pays the tax--the workers or the firms?), the incidence of the sales tax (who pays--customers or sellers?), the incidence of the income tax (who pays--workers or firms?) and so forth.

 

Mark

Mark, I believe that however (im)perfectly elastic the demand of buyers is at a given price level, it will usually be the same under both commission structures I presented. And in the case of auctions, I don't feel that there often is a real competition among the sellers which leads to an elastic supply.

[mark]

Mark:

 

If you are talking about the sale of a unique or virtually unique item--say an 1804 dollar or whatever--then the supply is (almost) perfectly inelastic and the buyer will wind up paying 100% of the premium. If you are talking about the sale of widgets (recall that word? )--say some PR66 1950 coins or PR64 3 CNs--then the supply will not be perfectly inelastic--if the price in one auction is higher than before, almost surely more of the coins than otherwise will show up in other auctions in the future. In this sense and in this case, the supply will not be prefectly inelastic and the premium will be split between the buyer and the seller, with the split depending on the various elasticities.

 

I agree with your statement that the demand likely will be the same under both premium strategies. The point is that the more elastic the demand, that is, the more buyers that drop out as the price rises, regardless of the premium strategies set by the auction house, the less of the total premium (the sum of the buyer's and seller's premiums) buyers will pay and the more of the total premium sellers will pay.

 

Mark

[MarkFeld]

The point is that the more elastic the demand, that is, the more buyers that drop out as the price rises, regardless of the premium strategies set by the auction house, the less of the total premium (the sum of the buyer's and seller's premiums) buyers will pay and the more of the total premium sellers will pay.

Mark, we are in agreement there. Others might disagree, but my feeling is that the very large majority of coins fall into the category of highly elastic demand, and thus, the sellers pay virtually all of the so-called "buyer's premium".