An open outcry auction may generate higher bid prices than a sealed bid auction as bidders have an opportunity to learn the expected valuations of the other bidders. Competition between bidders may drive prices up further. Conducting two auctions using different formats (sealed bid versus open outcry) will allow students to experience the differences first hand.
The March Madness in the Classroom exercise was conducted at Mount Saint Mary’s University in Emmitsburg, Maryland. In the open outcry auction, bids totaled $3,939,150 while the bids totaled $2,511,219 in the sealed bid auction. The difference between the two ($1,427,931) occurred as a result of competition between the students as they bid for sponsorship rights. For example, Duke University sold its sponsorship rights for $240,000 in the open outcry auction and $148,000 in the sealed bid auction. Competition drove up the price $92,000. However, bidders also learned how others students valued Duke as the auction progressed. The winning bidder in the sealed bid auction had a pre-auction expected value of $157,348. The winner in the open outcry auction, however, had a pre-auction expected value of $81,256. In the open outcry auction, the eventual winning bidder learned that another bidder valued Duke at least $76,092 more.
Learning accounted for bidders raising their maximum valuations $1,046,937 and then competition drove the bid prices up an additional $1,427,931. Certainly students realized that the open outcry auction format will generate more revenue for a seller with a group of irrationally exuberant bidders.