Optimal Reservation Prices in Auctions

Dan Levin () and James Smith

Economic Journal, 1996, vol. 106, issue 438, 1271-83

Abstract: The risk-neutral independent-private-values (IPV) auction model produces curious results regarding the use of reservation prices: no matter how many bidders, the seller should announce a fixed reservation price above his true value. This is notable since the seller gains by adopting an inefficient institution, and puzzling because it conflicts with common practice. The authors relax the IPV assumption; characterize optimal reservation prices in a richer class of auctions; and show that, when information is correlated, the seller's optimal reservation price converges to his true value, often monotonically and rapidly, as the number of bidders grows. Copyright 1996 by Royal Economic Society.

Date: 1996
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