SPEAKER_06: Amazing, fascinating stories of inventions, ideas and innovations. Yes, this is the podcast about the things that have helped to shape our lives. Podcasts from the BBC World Service are supported by advertising.
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SPEAKER_00: In the year 211 BCE, the Carthaginian general Hannibal stood outside the gates of Rome. Although he had little prospects of breaching the city's defences, he hoped the Romans would panic. The historian Edward Gibbon relates what happened next.
SPEAKER_03: He encamped on the banks of the Anio at the distance of three miles from the city, and he was soon informed that the ground on which he had pitched his tent was sold for an adequate price at a public auction.
SPEAKER_00: The implication was obvious. Rome had seen through the bluff. If Romans were willing to trade at full price the land underneath Hannibal's army, they did not expect his army to linger. It did not. Hannibal withdrew in short order. This may be the only example of an auction being used as an attack on enemy morale, but it is not the first recorded auction. Auctions seem to be almost as common as the marketplace itself. You can imagine the idea being endlessly rediscovered around the world. Whenever some trader offered to pay three oebbels per jar for a shipment of olive oil, and the man next to him said, don't take that offer, I'll pay four. From such simple moments evolved the theatrical event we call the open outcry auction. A room full of art or antique dealers, millionaire backers submitting bids by phone, and a dapper auctioneer tickling the whole process along. Going once, going twice, gone. By making clear what others are prepared to pay, such auctions make it hard for the unscrupulous to exploit the gullible. In the early 19th century, British traders used auctions to offload large volumes of inexpensive British products in the United States. American consumers were delighted. American merchants were indignant. One of them, Henry Niles, complained in 1828, auctions are the grand machine by which British
SPEAKER_03: agents at once destroy all regularity in the business of American merchants and manufacturers.
SPEAKER_00: An anti-auction committee lobbied Congress, declaring, auctions are a monopoly, and like
SPEAKER_03: all monopolies are unjust, by giving to a few that which ought to be distributed among the mercantile community generally.
SPEAKER_00: That was special pleading. The mercantile community just wanted to preserve their markups. Yet there is an important grain of truth in the complaint. In any auction, the sellers want to be where the buyers are, and the buyers want to be where the sellers are. That makes auctioneering a natural monopoly. There is always a risk that large auction venues abuse their market power. While the open outcry auction is the most famous kind, there are many other ways to design an auction. The Dutch clock auction is used at the vast flower market of Alsmeer, and the clock face shows not the time, but the price. That price ticks down and down until somebody stops the clock by pressing a button. Whoever stopped the clock buys the flowers at the price specified. At first glance, the method could hardly be more different from an open outcry auction. The fundamentals are not so very different though, and they're even faster, as befits a product that will quickly wilt if it cannot be sold and shipped. Then there is the sealed bid auction, beloved of estate agents. Write down your bid, slip it into an envelope, and seal it tight. Highest bid wins the prize. But here's a curiosity. Under the surface, the sealed bid auction is exactly the same as the Dutch flower clock auction. In each case, you simply need to pick your price. Unlike in an open outcry auction, you'll learn nothing about anybody else's willingness to pay. Until it's too late. The Nobel laureate economist William Vickrey, he of the famous turnstile, produced a famous theorem demonstrating that under ideal conditions, all auctions can be expected to raise the same amount of revenue. Like any economic theorem, that oversimplifies the case. Auction details can matter a lot. If an auction opens up a loophole for cheats, or discourages bidders from bothering, it can fail badly. One might ask why auctions are used in some circumstances, while in other cases, sellers post a take-it-or-leave-it price. Your local supermarket, for example, does not auction off the cabbages. The answer is that auctions come into their own when nobody is quite sure of the value of what is being sold. Second-hand products sold on eBay are an obvious example, but there are many others. A permit to drill for oil in unexplored terrain. A painting by Leonardo da Vinci. Or a license to use radio spectrum to provide mobile phone services. This common resource, the radio spectrum, used to be handed out to favoured companies for trivial sums. Now governments auction it off for billions. In each case, the true value is unknown. Each bidder will have their own information. The auction brings together all of that information and transforms it into a price. It's quite a trick. And it's something the Romans understood when they reported the results of an auction to tell Hannibal, we're not scared. While auctions seem reassuringly old school, they take place at the cutting edge of the modern digital economy. Think about what happens when you type a search term into Google. Alongside your search results, you'll see advertisements. Those adverts are there because they won a complex auction which assigns them more or less prominent positions, depending both on their bid per click and on how good the Google algorithm thinks the advertisement is. An art dealer might offer a high fee to appear next to searches for Picasso. But an advertiser selling Picasso posters might expect many more clicks. And win top spot in the auction for a lower per click bid. These auctions take place every time someone types a search into Google, and their scale is unnerving. Google's parent company Alphabet makes more than $2 billion profit every month. Most of that is from advertising, and most of the advertising is sold by auction. In 2019, Google was estimated to have taken more revenue from advertising than its two biggest rivals, Facebook and Alibaba, combined. Often you see an advert for Google's own products. Is it a problem that Google bids in its own auctions? It's hard to be sure. You can imagine how any company might benefit from intimate knowledge of its rivals' strategies in bidding for ad space, although Google insists it gets no unfair advantage from its dominant market position. Henry Niles, the anti-auction activist, would no doubt have had something to say about that.
SPEAKER_05: A classic work is Ralph Cassidy's Auctions and Auctioneering.
SPEAKER_04: For a full list of our sources, please see bbcworldservice.com slash 50things.
SPEAKER_07: If you search for The Compass wherever you get your podcasts, you'll find an archive of amazing stories from all over the world. We just got off the train and our fellow passengers, everyone's rushing to take a taxi.
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