Even the most common household items can be sold for far above their actual value in online auctions once they have belonged to celebrities. The association of a hugely admired person with the item increases the value which people place on it and can lead to people paying thousands of dollars for celebrity’s underwear, hair bands or items of clothing. Jimi Hendrix’s Fender Stratocaster which he played at Woodstock was bought in auction by Paul Allen so it could be on show at the Experience Music Project in Seattle, which is Hendrix’s hometown. Now a Stratocaster is going to set you back a couple of thousand anyway, but when it just so happens to be the Stratocaster that Jimi Hendrix played the Star-Spangled Banner on at Woodstock the price of the guitar is going to go up. Does this mean that the guitar is worth $2 million? Not necessarily, I mean there is no more quality added to the guitar other than the sentimental value fans will place on it. Fans of celebrities will be willing to pay large amounts of money for items in auctions if they have been owned or used by their idols but most of them will pay way over the value of the item. Why? The Winner’s Curse.
The Winner’s Curse is a phenomenon which occurs in common value auctions where there is incomplete information about the item being sold and as a result of which the winning bidder tends to overpay. The phenomenon occurs because, in common value auctions where the highest bidder wins, bidders will make bids not just to try and buy the item up for auction but also to discourage rival bidders from participating in the auction. This usually leads to people bidding high amounts which they think others won’t be willing to pay for the item being auctioned because they don’t think it is worth that much.
This phenomenon usually leads to the winning bidder spending over the actual value of the item, and when you think about it makes sense. I mean the reason people are willing to sell you something in the first place is that they deem the money you are offering to pay for the item they have more than the value of the item itself.
By Daragh O’Leary