Auction Driven markets and Market Driven Prices

In a conversation with a friend, I was raised with a question how can a Stock market be better when the prices keep going Up and Down while a real estate investment most certainly never goes down and in all likelihood is going up.

While the merits of each Asset class is different and in most cases subjective, I would like to delve more in detail on the behavior of different markets and their effect on prices.

In order to avoid individual biases, lets take a more simplistic and practical used case of a Cricket ground.

Tickets are priced at different ranges based on the views (Straight view, Side view), the elevation and the services offered. However, these prices are typically fixed except for some discounts for corporate and clubs.

This is similar to the pricing of Real state.

Similarly, the rates of properties may have different valuation based on the attributes of a property (Corner sites, Access to Main road, Proximity to Hotspots,etc ). But, the Seller like the Cricket stadium sets a price for piece of land according to the going rate in the area which is usually fixed.

A Buyer in both cases do not have much bargaining power to buy them at a deep discount (Say 40% or 50%).

This is a Zero Sum game.

Lets take a hypothetical scenario to simulate the Stock markets.

Assume every Seat in a cricket stadium is auctioned. The price of each seat keeps varying based on the demand.

Lets take Chepauk as an example that has a seating capacity of 30,000 with an average ticket price of Rs.1000.

High Demand Scenario:

Lets assume a Cricket match between India and Pakistan or CSK vs MI. These are usually sold out.

So, revenue for the Seller is 30,000 x Rs. 1000 = Rs. 3,00,00,000 (Rs. 3 Cr).

If each Seat is auctioned, God knows what would be the final auction determined price.

It wont be a surprise if it hits 5x or 10x. (seller makes 15-30Cr)

Buyer gets to watch the match that he values more.

Buyer is Happy, Seller is Happy.

Both get the value, Its a positive Sum game!

Low Demand Scenario:

Lets assume a Cricket match between Afghanistan and Bangladesh or Punjab kings vs LSG. These are mostly. You usually see empty grounds. Say 15% of people in the ground.

So, revenue for the Seller is 4500 x Rs. 1000 = Rs. 45,00,000 (Rs. 45 Lakhs).

If each Seat is auctioned, lets say people find value @ Rs.200 which is a 80% discount (seller makes 60 Lakhs)

Buyer gets to watch the match at a very deep discount (80%). On the other hand, the Seller makes more revenue than if it was fixed prices.

Buyer is Happy, Seller is Happy.

Both get the value, Its a positive Sum game!

There can be other scenarios that cut both ways. But typically, auction driven markets provide value to both Buyer and Seller. If the market participant is value conscious and knows when to buy and when to sell, one can easily benefit. The value moves out of inefficient people to efficient people over time.