Auctioneers as Market Makers: Managing Momentum in Chittagong Tea Auctions∗

In an auction market, the auctioneer exerts significant influence in choosing and administering a selling strategy. We make the case for viewing the auctioneer as a market maker, whose success depends on how well he manages externalities without jeopardizing the trust of the buyers and sellers. We illustrate that incentives of the market maker may not be aligned with that of individual sellers. Using a unique data set, from tea auctions in Chittagong, Bangladesh, we argue that an auctioneer’s actions maintain a careful balance of his own incentives vs. those of his clients, and the auction outcomes are affected by how much discretion the auctioneer has in choosing the selling strategy. Specifically, we find that raising the reserve price for a lot exerts a positive price externality on subsequent lots within the auction. To manage the momentum of market prices, the auctioneer chooses higher reserve prices for tea produced by tea estates in which he has an ownership stake. While these teas receive a higher price when sold, they sell less frequently creating a short run cost to the auctioneer but an overall positive impact on market prices. Thus, consistent with the role of a market maker, a desire to appear non-opportunistic, rather than opportunism, seems to better explain the auctioneer’s actions. ∗We thank Ashraful Hasan, Woo-Hyung Hong, and Pengfei Sui for excellent research assistance. Seminar participants at AEA Annual Meetings, University of Chicago, University of Toronto, University of Washington, and Choice Symposium 2013 (Noordwijk, Netherlands) provided useful feedback. We thank Pat Bajari, Philip Bond, Yoram Barzel, Andrew Ching, Pradeep Chintagunta, J.P. Dube, April Franco, Avi Goldfarb, Rachel Heath, Chris Nosko, Mallesh Pai, Shuhash Shimon, and Chad Syverson for their comments and suggestions. Financial assistance from Hong Kong Research Grants Council via grant # 641808 is gratefully acknowledged.