Low Reserve Prices in Auctions

27 Pages Posted: 22 Mar 2017 Last revised: 24 Mar 2017

See all articles by Audrey Hu

Audrey Hu

Tilburg Law and Economics Center (TILEC)

Steven A. Matthews

University of Pennsylvania - Department of Economics

Liang Zou

University of Amsterdam - Faculty of Economics and Business (FEB)

Date Written: March 13, 2017

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 sellers' 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

JEL Classification: D44, D82

Suggested Citation

Hu, Audrey and Matthews, Steven A. and Zou, Liang, Low Reserve Prices in Auctions (March 13, 2017). PIER Working Paper No. 17-004, Available at SSRN: https://ssrn.com/abstract=2937929 or http://dx.doi.org/10.2139/ssrn.2937929

Audrey Hu (Contact Author)

Tilburg Law and Economics Center (TILEC) ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands

Steven A. Matthews

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States
215-898-7749 (Phone)
215-573-2057 (Fax)

HOME PAGE: http://www.econ.upenn.edu/~stevenma

Liang Zou

University of Amsterdam - Faculty of Economics and Business (FEB) ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

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