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What is a Bidding War?
A bidding war occurs when there are too many buyers competing for the ownership of a single property to the extent of increasing the price of the property through increased bids. When the seller of a property receives several offers over a property, a bidding war can erupt. A bidding war occurs in competitive bidding when there are two or more buyers interested in a particular item and they engage in increasingly higher offers in order to have possession of the item.
Back to: ECONOMIC ANALYSIS & MONETARY POLICY
What causes a Bidding War?
In competitive bidding, a bidding war occurs within the shortest period of time, to the extent that competitive buyers do not have the time to think through the offers they make but sporadically increase prices just to gain ownership of the property. Dealing in multiple bid offers is not an ideal practice for a buyer, but is played out in the real market. Although bidding wars do not happen as frequently as they used to, a buyer can still find himself in competitive bidding creating a bidding war. Oftentimes, a bidding war causes the final price of a property to exceed the original highest price the seller wants to yield the property for. For instance, if the original intention is to give a property away for $400,000 maximum price, the increasingly high bids placed by buyers can cause the property to be sold for a price higher than $400,000. Not all properties experience bidding wars, it is often common with properties located in desirable locations or has a high net worth.
Bidding Wars and Escalation Clauses
Bidding wars happen at a fast pace, leaving buyers to make decisions influenced by emotions rather than logic. In the real estate market, escalation clauses go hand in hand with bidding wars. When sellers of properties perceive a bidding war, they implement escalation clauses which allow them automatically increase the bid by a specific amount if they receive a bid higher than the original sale price. While an escalation clause gives a seller the ability to increase the price of a property, it also stipulates the highest price buyers are willing to pay for a specific property. It is vital that a seller is aware of the maximum price contained in an escalation clause before implementing the clause.
Related Topics
- Market Structure
- Perfect Competition
- Bidding War
- Complements & Substitutes
- Substitution Effect
- Imperfect Competition
- Market Power
- Price Takers
- Price Makers
- Perfect Competition and Decision Making
- X-Efficiency
- Captive Market
- Contestable Market Theory
- Highest Profit Point in a Perfectly Competitive Market
- Marginal Revenue
- Using Marginal Revenue and Marginal Costs to Maximize Profit
- Marginal Revenue Curve
- Profit Margin and Average Total Cost
- Break Even Point - Cost Curve
- Shutdown Point - Cost Curve
- Short-Run Decisions Based Upon Costs in a Perfectly Competitive Market
- Marginal Costs and the Supply Curve for a Perfectively Competitive Firm
- Long-Run Average Supply (LRAS)
- Decisions to Enter or Exit a Market in the Long Run
- Long-Run Equilibrium in a Perfectly Competitive Market
- Constant, Increasing, and Decreasing Cost Industries
- Productive and Allocative Efficiency in Perfectly Competitive Markets
- Market Efficiency
- Market Inefficiency
- Pareto Efficiency
- Market Failure
- Search Theory
- Monopoly
- Natural Monopoly
- Legal Monopoly
- Bilateral Monopoly
- Promoting Innovation through Intellectual Property
- Predatory Pricing
- How Monopolists Set Price with the Demand Curve
- Total Cost and Total Revenue for a Monopolist
- Marginal Revenue and Marginal Cost for a Monopolist
- Inefficiency of Monopoly
- Perfectly Competitive Market
- Monopolistic Competition
- Duopoly
- Oligopoly
- Differentiated Products
- Perceived Demand for a Monopolistic Competitor
- Monopolistic Competitors Choose Price and Quantity
- Monopolistic Competitors and Entry
- Monopolistic Competition and Efficiency
- Cartel (Economics)
- Game Theory
- Traveler's Dilemma
- Prisoner's Dilemma
- Iterated Prisoner's Dilemma
- Nash Equilibrium
- Diner's Dilemma
- Trembling Hand Perfect Equilibrium
- Gambler's Fallacy
- Arrows Impossibility Theorem
- Backward Induction
- Tournament Theory
- Oligopoly and the Prisoner’s Dilemma
- Forcing Cooperation in a Prisoner’s Dilemma
- Cooperation and the Kinked Demand Curve
- Corporate Merger or Acquisition
- Antitrust Laws
- Herfindahl-Hirschman Index
- Concentration Ratio
- Other Approaches to Measuring Monopoly Power in an Industry
- Restrictive Practices under Antitrust Law
- Natural Monopoly
- Cost-Plus Regulation
- Price Cap Regulation
- Regulatory Capture