Auctioneers as Market Makers: Managing Momentum in Chittagong Tea Auctions

37 Pages Posted: 17 Mar 2016  

Tanjim Hossain

University of Toronto

Fahad Khalil

University of Washington - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Matthew Shum

California Institute of Technology

Date Written: March 2016

Abstract

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.

Suggested Citation

Hossain, Tanjim and Khalil, Fahad and Shum, Matthew, Auctioneers as Market Makers: Managing Momentum in Chittagong Tea Auctions (March 2016). CESifo Working Paper Series No. 5843. Available at SSRN: https://ssrn.com/abstract=2748673 or http://dx.doi.org/10.2139/ssrn.2748673

Tanjim Hossain

University of Toronto ( email )

Department of Statistical Sciences
Toronto, Ontario M5S 3G8
Canada

Fahad Khalil

University of Washington - Department of Economics ( email )

Box 353330
Seattle, WA 98195-3330
United States

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Matthew Shum (Contact Author)

California Institute of Technology ( email )

Pasadena, CA 91125
United States

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