A Brief History of Auction Models: From Antiquity to the Present Day

In June 2023, Sotheby’s, one of the world’s leading auction houses, announced it would begin using a Dutch auction model instead of the English model for its new Gen Art NFT program. Neither of those models is a novelty for the art market — in fact, the Dutch model dates back to the 17th century. The rich historical context behind these auction models, and their long-lasting appeal, should arouse our curiosity. What were the circumstances surrounding their origin, and why have they proven to be so durable? In this article, we will ponder these questions as we survey the English, Dutch, and other types of major auction models and explore the social, economic, and technological factors that have influenced and shaped their development over time.

The Rise of English and Dutch Auction Models

The earliest recorded auctions took place around 500 B.C., with Greek scribes like Herodotus chronicling marriage auctions in Babylon. In ancient Rome, soldiers employed spear-driven auctions to distribute the spoils of war, including the auctioning of slaves.

Auctions lost popularity in Europe from the end of the Roman Empire till the 18th century, when England employed ‘auctions by candle.’ The end of an auction was marked by the expiration of a candle flame to make their exact timing uncertain and thus prevent last-second bids. Essentially, the ‘candle auction’ became either the prototype or rather one of the numerous variations of the English auction model, which is still the most common type of auction, where the starting price is low, and bidders make progressively higher offers until no one is willing to bid anymore.

Other models akin to the Dutch auction model appear to date back to antiquity. Herodotus mentioned descriptions of declining price auctions in Babylon, suggesting that in ancient times, market mechanisms similar to Dutch auctions were used. In this type of auction, the auctioneer starts with a high price and progressively lowers it until a bidder accepts the price. In 17th-century Holland, declining-price auctions were used to sell real estate and paintings, as well as perishable goods like fish, fruit, or flowers, owing to their speed advantage. The Dutch auction method also appeared in England by the 17th century, where it was known by the term “mining.”

18th Century to the Great Depression: Enter the Vickrey and Penny Auction Models

The modern history of auctions emerged in the mid-1700s, with pivotal events shaping the landscape. Edward Earl of Oxford’s art collection, venturing into the auction world, marked a milestone. This period also witnessed the emergence of two auction house giants: Sotheby’s in 1744 and Christie’s in 1766, both rooted in London and eventually expanded to America.

On the verge of the 19th century, another auction model — the Vickrey auction, or second-price sealed-bid auction — was introduced. In 1797, Johann Wolfgang von Goethe sold a manuscript using a sealed-bid, second-price auction, and this model had been used by stamp collectors since 1893.

Vickrey is a type of sealed bid auction in which the bidders submit a single sealed bid, and the highest bidder wins. What distinguishes the Vickrey model is it dictates that the winner pays the second-highest bid amount rather than their own and provides an incentive to bidders to offer an item’s true perceived value. Despite the emergence in the 19th century, the Vickrey was first academically described in 1961 by Columbia University professor William Vickrey (hence the name).

During the 19th century, the art market experienced exponential growth. Due to colonialism and global trade, this period witnessed a surge in the auctioning of diverse artifacts, encompassing African and Asian treasures, alongside classical masterpieces and contemporary creations.

Following this era of expansion, the art market faced transformative shifts with the conclusion of the American Civil War, attracting both American industrialists and European collectors in pursuit of various assets. However, the subsequent impact of the Great Depression in the United States and World War II led to a tumultuous time, profoundly reshaping the art market landscape.

In fact, during the Great Depression, another auction model arose — Penny auctions. It applied to the foreclosure of farms or property: neighbors would gather in large numbers at the auction and place bids of only a few pennies. Later, in 2005, Penny auctions returned as a vehicle for consumers to bid for online products at steeply discounted prices.

1950s-1980s: Prestige ‘Evening Sale’ Auctions Take Off

Following World War II, East Asian nations — China, Japan, and Korea — established robust local art markets, while the European scene experienced a slower recovery, primarily led by private dealers.

The art auction landscape underwent a massive transformation during the period fuelled by Sotheby’s, who pioneered the format of the ‘Evening Sale’ auction in 1958, transitioning auctions from staid events for professionals to glamorous, celebrity-filled spectacles symbolizing status and high culture. This was also a time of technological change, and Sotheby’s was the first to invest in new, game-changing technology for auctions, introducing telephone bidding and satellite links in London and New York in the 1960s.

At the same time, as contemporary art gained in prominence and stature, iconic names like Monet, Van Gogh, Picasso, Pollock, and Warhol took center stage, superseding the dominance of Old Masters and reshaping price dynamics. While auction houses were busy re-inventing themselves as luxury goods companies, in the 1980s, art emerged as an alternative investment asset, shifting investors’ perspectives and giving rise to a whole new class of collectors who prized monetary value over passion and connoisseurship. Investors gained an appreciation of the financial benefits of collecting art.

1990s: SMRA and Online Auctions

In 1993, Stanford economists Robert Wilson and Paul Milgrom designed a new auction model — simultaneous multiple round auctions (SMRA).

This model has emerged as a solution to address the limitations of open ascending or descending-bid auctions, like the English or Dutch. Milgrom found that in the English model case — where bidding starts low and prices go up, bidders gained more information about an item’s value during the bidding process. He also found that the more information bidders have about an object’s value, the higher the revenue. The role of information for bidders, the two economists found, was pivotal to the outcome of an auction sale.

SMRA were designed to deal with the information problem. In this system, all items are put up for sale at once, and buyers can bid on any subset of items. Bidding is done in rounds where bidders discreetly place their bids at the same time. At the end of each round, all bids are revealed, providing bidders with information about the item’s value while ensuring that the item goes to whoever values it the most.

This new model, involving concurrent bidding on various items in discrete rounds, mitigated the likelihood of the “winner’s curse,” where the person who most overestimates the value will tend to win, but in overestimating, they get stuck paying more than the item is actually worth. Their concept was embraced by the US Federal Communications Commission for allocating broadcast spectrum licenses among broadcasters and mobile phone carriers, while also inspiring adaptations in sectors like electricity and even fishing, where intricate interactions demand auction systems beyond one-to-one transactions.

Another transformative event that influenced the evolution of auction models took place in the 1990s: the birth of the World Wide Web. With the emergence of the Internet came the development of online auctions, eBay being a typical example. A major advantage of the online auction model is that by removing the physical limitations of traditional auctions it allows more people to participate and bid in real time, increasing overall audience size and reach.

However, despite the rapid expansion of the Internet and the consequent growth in online sales, auctions featuring the most coveted artworks and luxury colleсtables largely remained offline events for a privileged audience behind closed doors. This pattern continued for much of the last two decades.

2020-Today: Live-Streamed In-Person Auctions

“On June 29, 2020, the first live-streamed global art auction began at a civilized 6.30 p.m. cocktail hour in New York” — when Sotheby’s streamed a real-time version of its previously canceled in-person Spring auction that brought together buyers from New York to London to Hong Kong.

A few weeks later, in July 2020, Christie’s also utilized a global live-streamed auction format, transforming their auction rooms into TV studios for a mass audience.

A global live-streamed auction presents some challenges. For instance, the Sotheby’s auction took nearly 5 hours to sell 62 lots, more than three times what it would have taken in the auction room. Other challenges stem from the technology side, such as latency, and tackling streaming latency is just one of them.

Yet, amidst all the challenges, it appears that the time for this new auction model has come. As social distancing norms took hold around the world during the global Covid pandemic and hobbled in-person events, the live-streamed auction phenomenon came into its own and turned the auction business playbook of limited access to exclusive sales events on its head. Live-streamed auctions during the period have seen record numbers of attendees, giving them more of the quality of a grand sporting event than a private rendezvous for art world VIPs.

Along with attracting a healthy dose of online bidding from buyers across the globe, live-streamed auctions have demonstrated that buyers are no longer afraid to bid fortunes online for artworks, even at the highest levels. For instance, during the Sotheby’s auction, an online bidder in China who was after Francis Bacon’s “Triptych Inspired by the Oresteia of Aeschylus,” was willing to bid a cool $73.1m online in an attempt to win it.

Final Thoughts

Coming back to the recent announcement about Sotheby’s adoption of the Dutch model in 2023. It’s a good illustration of how the auction model landscape is continuously evolving and adapting to new market opportunities and changing market dynamics. Live streaming and other emerging technologies like Web 3.0, AI, and 3D holograms have the potential to significantly impact and influence the future auction model landscape. In part 2 of this article, I will look at these technologies in more depth and explore how they may impact that landscape moving forward.

Author: Doron Fagelson,
Vice President of Media and Entertainment Practice at DataArt
Originally published on https://www.dataart.com/blog/