For the past eight years, Westminster College, a nonprofit college in Salt Lake City with 2,500 students, has held an annual live and silent auction to raise scholarship money. But next year, there won’t be an auction.
“Even though our auctions were successful overall, we had to admit that the staff and volunteer time involved in getting several hundred auction items donated, tracked, and presented did not measure up against the money [the auctions] raised for student scholarships,” says Kami St. John, director of annual giving at Westminster.
An August 2005 Journal of Political Economy article similarly concludes that conventional auctions are “inept fundraising mechanisms,” as wrote its authors, Jacob K. Goeree of the California Institute of Technology, Emiel Maasland of Erasmus University Rotterdam, Sander Onderstal of the University of Amsterdam, and John L. Turner of the University of Georgia.
Goeree and his colleagues explain that nonprofit auctions face a free-rider problem that ultimately reduces how much their participants bid for prizes. Participants in charity auctions, unlike those at for-profit auctions, have two motivations: to win prizes, and to support the cause. Even if they don’t succeed at winning prizes, they can still feel that they are supporting the cause. Moreover, while winning bidders get a prize and the satisfaction of helping the charity raise money, a “losing” bidder can get the satisfaction of helping to raise money without actually spending a dime. As a result, bidding is dampened, and money raised at nonprofit auctions tends to be lower than the amount generated by equivalent for-profit auctions.
Take, for example, a charity wine auction. Participant A bids $100 for a bottle of wine. If his bid is highest, he will have the satisfaction of helping the charity raise money and of enjoying the wine. But this double pleasure will cost him $100. Meanwhile, Participant B could raise the bid to $110. But even if she does not raise the price and win the wine, she can still get the singular satisfaction of watching the charity raise money – albeit at Participant A’s expense. Because Participant B can free ride on Participant A’s bid, she will not bid the amount that she would have otherwise bid in a for-profit auction, and the wine will sell at a lower price.
Even if Participant B does decide to bite the bullet and pay $110, the charity still misses out on the money that Participant A was poised to donate. As Goeree puts it, the higher bid “annihilates” the first bid.
Not content just to point out the shortcomings of traditional auctions, the authors describe what an ideal nonprofit fundraising auction might look like. First, it would have an entry fee to guarantee that all participants make a minimum contribution. Second, it would establish reserve prices below which the prizes will not be sold. Finally, and most radically, Goeree and his coauthors recommend that even those bidders who do not win the prize must still pay the price of their last bid – what is known as an all-pay auction. Such an auction would combine the fundraising benefits of a raffle (where all participants pay, regardless of whether they win) with the efficiency of an auction (where the bidder who values the prize most – and therefore will pay the highest price – wins).
St. John is not so sure that donors in her community would be willing to bid on prizes for which they would have to pay even if they didn’t get to take them home. “The risk of losing would keep the bidding really low, I would think,” she says. Westminster is instead exploring an online auction format, with lower costs, fewer administrative hassles, and more flexibility – a solution where everybody could win.
Read more stories by Aaron Dalton.