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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.
A Little More on What is 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.
Reference for “Bidding War”
Academic research on “Bidding War”
The Bidding War to Attract Foreign Direct Investment: The Need for a Global Solution, Nov, A. (2005). The Bidding War to Attract Foreign Direct Investment: The Need for a Global Solution. Va. Tax Rev., 25, 835.
UK bidding war amidst merger mania, Mitchell, P. (2003). UK bidding war amidst merger mania.
Bidding wars over R&D-intensive firms: Knowledge, opportunism, and the market for corporate control, Coff, R. (2003). Bidding wars over R&D-intensive firms: Knowledge, opportunism, and the market for corporate control. Academy of Management Journal, 46(1), 74-85. The knowledge-based theory of the firm suggests that, as knowledge intensity increases, knowledge management concerns, not opportunism, should increasingly drive organizational boundary decisions. Therefore, as R&D intensity increases, knowledge-based theory should gain explanatory power over transaction cost economics, in which opportunism is the primary driver. However, this study shows problems of opportunism increasing with R&D intensity. For example, as R&D intensity increased, managers actively discouraged bidding wars. Transaction cost economics seems to gain explanatory power as knowledge intensity grows.
Bidding patterns in search engine auctions, Asdemir, K. (2006). Bidding patterns in search engine auctions. In Second Workshop on Sponsored Search Auctions. This study analyzes how advertisers bid for search phrases in pay-per-click search engine auctions. These auctions are fundamentally different than traditional auctions in that they have no closing times and they are continuous. We develop an infinite horizon alternative-move game of advertiser bidding behavior. We show that bidding war cycle and static bid patterns frequently observed in these auctions can result from Markov perfect equilibria. We consider the effect of minimum bid increment, the difference between the first and the second position, the advertisers’ patience, and the minimum bid on the advertisers’ and the search engine’s payoff.
Bidding wars for houses, Han, L., & Strange, W. C. (2014). Bidding wars for houses. Real Estate Economics, 42(1), 1-32. This article analyzes the time series and cross‐sectional patterns of bidding wars for houses. Bidding wars were once rare, a fairly constant 3–4% of transactions. This led to treating list price as a ceiling in empirical and theoretical research on housing. The bidding war share roughly tripled between 1995 and 2005, rising to more than 30% in some markets. The share fell during the subsequent bust, but it remains approximately twice as high as previously. The article shows bidding war incidence to be greater during macroeconomic and housing booms. The article also considers other potential contributing factors, including buyer irrationality, the use of the Internet in home purchases and land use regulation.
Late bidding and the auction price: evidence from eBay, Hou, J. (2007). Late bidding and the auction price: evidence from eBay. Journal of Product & Brand Management, 16(6), 422-428.