REA consignments

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Posted By: Jay

Actually, the math is pretty easy in a perfect world:

If the "Purchase Price" of the lot(the net amount the buyer pays) is P, the buyer's premium is BP and the consignor's comission is CP, then the the amount that the consignor realizes is calculated as follows:

P=Hammer(1+BP)

Consignor Realization=Hammer(1-CP)
=P(1-CP)/(1+BP)


Interestingly, the consignor actually does a little better as more of the burden is shifted to the buyer. If the consignor and the buyer both paid 10% then the consignor realizes .818P. If the consignor pays nothing and the buyer pays 20% then the consignor realizes .833P. If the consignor pays a negative 5% and the buyer pays 25% then the consignor realizes .84P.

Also, the auction house does worse as more of the burden is shifted to the buyer. Why? The auction house realizes the hammer times (BP+CP). In a perfect world the Purchase Price does not vary based on the fees. It is the lot's worth and buyers will adjust their bids to pay this value (or less). However, as the BP increases, even if the CP decreases by a like amount, the Hammer decreases to keep the Purchase Price unchanged. Because the Hammer is what determines the auction house premium this will result in a lower auction house take if the sum of the BP and CP is unchanged. As one might guess, this difference is exactly equal to the gain to the consignor as the BP increases.
So, what does this say. Basically that auction houses are costing themselves money by shifting the burden from consignors to buyers.