Low Reserve Prices in Auctions

Audrey Hu (), Steven Matthews () and Liang Zou ()
Additional contact information
Audrey Hu: Department of Economics, City University of Hong Kong
Liang Zou: Department of Economics, University of Amsterdam

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: Received auction theory prescribes that a reserve price which maximizes expected profit should be no less than the seller's own value for the auctioned object. In contrast, a common empirical observation is that many auctions have reserve prices set below seller's values, even at zero. This paper revisits the theory to find a potential resolution of the puzzle for second-price auctions. The main result is that an optimal reserve price may be less than the seller's value if bidders are risk averse and have interdependent values. Moreover, the resulting outcome may be arbitrarily close to that of an auction that has no reserve price, an absolute auction.

Keywords: reserve price; risk aversion; interdependent values; second-price auction (search for similar items in EconPapers)
JEL-codes: D44 D82 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2017-03-13, Revised 2017-03-13
New Economics Papers: this item is included in nep-des, nep-gth, nep-mic and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Low Reserve Prices in Auctions (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:pen:papers:17-004

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