This is a "real world" question.
Recently I witnessed the separate auctions of about 30 houses. The place where I went uses the following rules. The following describes the procedure for the auctioning of a single house.
First, an English auction is held (as far as I could tell, without a hidden reserve). The highest bidder "A" at the end of this round is invited to come forward and show identification and proof of his/her ability to pay the bid plus costs and taxes.
Then a Dutch auction is held (of the same house), starting much higher. All can participate. If any bidder "B" (or "A") accepts a price above the winning bid of the first round, then he wins the overall auction and is invited to come forward and show identification and proof of his/her ability to pay the bid plus costs and taxes. If the price reaches the bid of the first round, then bidder "A" wins the overall auction.
Now, it might occur to you that there is something very wrong with checking the validity of "A" and "B" only. At least, that occurred to me. But that is not the question.
The question concerns the strategies* that I think I observed. In almost all cases there was vehement bidding during the first round (up to an average of EUR 100,000). In the end stages three or two bidders would remain active. But during the second round I never saw an accepted price more than EUR 2,000 higher than the highest bid of the first round.
(I also noticed that most active participants appeared to be professionals or, at least, regulars.)
The only explanation that I could come up with was that perhaps none of the bidders really know what each house is "worth" (whatever that means), and therefore they heuristically and risk-aversely rely on the other bids, making sure that they are never more than a couple of EUR 1,000 higher. And that, since they learn nothing during the second round, they use the same threshold there.
But I figure that can hardly be an equilibrium. Why would you drive up the price in the first round if you could "always" pick it up in the second round for EUR 2,000 above a (much) lower price?
Or is this perhaps evidence of collusion and/or convention and/or stupidity?
Can anyone please explain the strategies* that I observed?
This video shows how the auction works.
It's in Dutch, but you'll see the following things happen.
4:16 The auctioneer asks for a first bid.
4:20 EUR 20,000 is bid.
5:56 The highest bid is recorded at EUR 42,000.
6:16 Round 2 starts at EUR 42,000 + EUR 60,000 = EUR 102,000. (This auctioneer makes it easy for himself by just mentioning the difference between round 1 and round 2 prices, instead of mentioning the full price, as I saw another one do.)
7:04 The winning bid is recorded at EUR 42,000 + EUR 5,000 = EUR 47,000.
Of course, this is a counterexample to my 30 observations, but I take it that otherwise it wouldn't have made such an exciting instructional video.
Edit. I recorded some of the bids and prices. As you can see, I forgot about three cases between EUR 2,000 and EUR 3,000. So, where I said "EUR 2,000", I should have said "EUR 3,000". Sorry about that.
initial bid round 1 | highest bid round 1 | | initial price round 2 | | | final price round 2 | | | | 5 16 80 16.7 50 140 250 140.9 50 125 350 125 30 59 150 59 40 112 300 114 40 117 300 177.3 (possibly a typo) 50 130 400 132 30 79 250 81.5 (oops) 30 68 250 68.4 40 62 200 65 (oops) 20 66 250 69 (oops) 100 274 (invalid) 234 234 500 234 (restarted) 50 171 300 171 5 45 150 46 10 74 250 74.2 40 71 250 72.2 40 67 250 68.8 40 87 300 87.6 40 82 250 82.1 100 225 450 225