Auction theory has so many assumptions that it really can’t be applied to buying a home. The link above assumes the highest bidder knows[1] the highest price the underbidder would pay, which is extremely silly. Apart from the fact that if you know the highest price of another bidder, then the seller also probably knows your highest price, and the seller can just ask for the highest possible price, duhhhh!
Bidding (auction or blind) is used precisely because the prices are not known.
Personally I have been involved with enough home auctions and blind bids to know that there are huge information asymmetries or uncertainties. When you lack information, sometimes you need to make your best bid, and you might value a property a lot higher than the underbidder.
I would like to see more protection against lemon markets, but realistically I can’t think of a fair way to enforce that. Banks and insurance protect some people against doing stupid things.
[1] First price auction: “if each player bids such that they bid the expected value of second highest bid”
> The link above assumes the highest bidder knows the price of the underbidder, which is silly
The first price auction and second price auction types are understood to be sealed bid. The English auction is open: bidders can bid more than once and see other bids.
In the second price auction, the underbidder's price is revealed when the auction ends, not during the bidding; the highest bidder pays that price.
In my experience academic auction theory is almost irrelevant when buying a house. I do have a close friend who designs huge market trading systems, so I will talk to them and validate my opinion.
In practice, house transactions appear to be driven by irrational or ignorant participants (vendors, other bidders, agents, banks, insurance companies) and sometimes understanding those factors can give you a significant edge in the market. Also every house transaction has different context, risks and it’s own unique factors, so it is very difficult to make generalised rules.
Disclaimer: I know little about auction theory, and I have only spent a few years trying to understand one tiny property market, so my opinions are not that valuable.
Right; so wouldn't those be the causes of whatever (if anything) is wrong, rather than bids being sealed? Give some irrational bidders open bids and they will have a bidding war instead.
Probably, less than people think. Sealed bid auctions do not increase revenue to the seller, according to auction theory.
https://en.wikipedia.org/wiki/Revenue_equivalence
> gives all of the information to one side (the sellers)
Well, not all the information; just what other people are bidding. But all that matters to the bidder is that that other bidders do not have access to more information.
The fact that someone's bid is higher than yours, is not caused by its temporary secrecy.