Ask two auction companies how they should get paid and you may get two very different answers.

One model charges the seller a commission, taking a percentage out of the winning bid before the seller receives a check. Another charges the buyer a premium on top of the winning bid while allowing the seller to keep 100% of the hammer price.

Critics of buyer’s premiums have a straightforward argument: buyers aren’t stupid. If they know they’re going to pay an extra 5% after winning, they’ll bid less. Therefore, the seller ultimately pays for the buyer’s premium through a lower hammer price.

There is research supporting the first part of that argument. But the second part doesn’t necessarily follow.

A buyer’s premium can reduce the hammer price and still leave the seller with more money.

What Happens on a $100,000 Sale?

Consider two auction companies. Company A charges the seller a 5% commission and no buyer’s premium. Company B charges no seller commission and a 5% buyer’s premium.

Suppose a tractor sells for $100,000 through Company A. The seller pays a $5,000 commission and takes home $95,000.

Now let’s assume the critics of buyer’s premiums are right and the buyer adjusts for the fee. If that buyer is willing to spend no more than $100,000 total, including a 5% premium, the maximum bid would be about $95,238.

Add the 5% premium and the buyer spends $100,000. The seller, however, receives the entire $95,238.

That’s still slightly more than the $95,000 received under the seller-commission model.

Why? Because adding 5% to a price and subtracting 5% from a price aren’t mathematically identical.

The Hammer Could Fall 5%

Here’s where it gets more interesting.

Under the seller-commission model, the $100,000 tractor leaves the seller with $95,000. Under a zero-commission model, the hammer price could fall all the way to $95,000 before the seller would take home less.

If the buyer’s premium knocks the hammer down to $98,000, the seller keeps $98,000. That’s still $3,000 more than the seller who got a $100,000 hammer price and paid a 5% commission.

So the important question isn’t simply whether a buyer’s premium reduces bids. It probably does to some degree. The question for the seller is whether it reduces the final price by more than the commission the seller would otherwise have paid.

What Does the Research Say?

Economists have studied how buyers react to fees in auctions, although much of the research comes from markets other than farm equipment.

A 2009 study published in Oxford Economic Papers examined fine-wine auctions and found that buyers adjusted their bids to account for buyer commissions. In other words, sophisticated buyers recognized the fee and bid accordingly. (academic.oup.com)

Other research suggests buyers don’t always adjust perfectly. Tanjim Hossain and John Morgan conducted field experiments on eBay in which costs were divided differently between the auction price and shipping charges. In theory, bidders should have cared only about the total amount they would spend. Instead, separating part of the cost into another fee sometimes increased seller revenue, suggesting buyers didn’t fully subtract that secondary cost from their bids. (fieldexperiments.com)

Another study of hundreds of online auctions found that buyers of computer monitors lowered their bids when shipping fees increased, but not enough to completely offset the higher charge. Higher fees were also associated with fewer bids, which highlights another potential downside: fees can affect participation as well as bid amounts. (emerald.com)

None of those markets is the same as a modern farm-equipment auction. A farmer bidding $200,000 on a combine is likely paying closer attention to transaction costs than someone bidding on a low-dollar item online. But the research does show that buyer behavior isn’t always as simple as adding a fee and assuming the hammer price will fall by exactly the same percentage.

What About Fewer Bidders?

This may be the stronger argument against buyer’s premiums.

Auctions depend on competition. If a fee discourages bidders from registering or causes someone to stop bidding sooner, the effect could extend beyond a simple 5% adjustment.

That’s why it would be misleading to claim buyer’s premiums never affect auction results. They can. The size of that effect will depend on the equipment, the fee, the bidders, the marketing and the auction itself.

But the reverse claim deserves the same scrutiny. A lower hammer price doesn’t automatically mean the seller lost money.

Consider two identical tractors. One sells for $100,000 with a 5% seller commission. The other sells for $98,000 with no seller commission.

The first auction gets the better headline price. The second seller gets the bigger check: $98,000 instead of $95,000.

The Math Changes Again on Expensive Equipment

There’s another factor with capped buyer’s premiums.

Tractor Tuesday charges sellers zero commission and zero listing fees for timed auctions. Buyers normally pay a 5% buyer’s premium, but that premium is capped at $7,500.

That means the effective premium gets smaller as equipment becomes more expensive. The cap is reached at a $150,000 hammer price. On a $200,000 machine, $7,500 equals 3.75% of the winning bid. At $300,000, it’s 2.5%. At $500,000, it’s just 1.5%.

A percentage-based seller commission doesn’t necessarily work that way. If an auctioneer charges an uncapped 5% seller commission, a $300,000 sale costs the seller $15,000 and a $500,000 sale costs $25,000.

That difference matters when comparing what a machine sold for with what the owner actually received.

Look at the Check, Not Just the Hammer

Buyer’s premiums can affect bidding. The research gives auctioneers legitimate reasons to make that argument, and experienced equipment buyers are certainly capable of calculating a premium before placing their bids.

But that doesn’t answer the seller’s most important question.

How much money do I take home?

If a buyer’s premium reduces a $100,000 hammer price to $98,000 but eliminates a $5,000 seller commission, the seller didn’t lose $2,000. The seller gained $3,000.

At equal 5% rates, a zero-commission auction has nearly 5% of room for hammer-price suppression before the seller ends up behind.

So when comparing auction fee structures, don’t stop at the winning bid. Look at what comes out of it, what gets added to it and, ultimately, how much money ends up in the seller’s pocket.