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Optimal Reservation Prices in Auctions

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Author Info
Levin, Dan
Smith, James L

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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.

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Publisher Info
Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 106 (1996)
Issue (Month): 438 (September)
Pages: 1271-83
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Handle: RePEc:ecj:econjl:v:106:y:1996:i:438:p:1271-83

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  1. G. Candela & A. Scorcu, 1997. "A Price Index for Art Market Auctions," Journal of Cultural Economics, Springer, vol. 21(3), pages 175-196, September. [Downloadable!] (restricted)
  2. David Lucking-Reiley, 2000. "Field Experiments on the Effects of Reserve Prices in Auctions: More Magic on the Internet," Framed Field Experiments 0056, The Field Experiments Website. [Downloadable!]
  3. Albert Choi, 2004. "A Rent Extraction Theory of Right of First Refusal," Econometric Society 2004 Far Eastern Meetings 759, Econometric Society. [Downloadable!]
  4. Lawrence M. Ausubel & Peter Cramton, 1998. "The Optimality of Being Efficient," Papers of Peter Cramton 98wpoe, University of Maryland, Department of Economics - Peter Cramton, revised 18 Jun 1999. [Downloadable!]
  5. Ausubel, Lawerence M. & Cramton, Peter, 1998. "The optimality of being efficient : designing auctions," Policy Research Working Paper Series 1985, The World Bank. [Downloadable!]
  6. Lawrence M. Ausubel & Peter Cramton, 1997. "Auctioning Securities," Papers of Peter Cramton 98wpas, University of Maryland, Department of Economics - Peter Cramton, revised Mar 1998. [Downloadable!]
  7. Lawrence M. Ausubel & Peter Cramton, 1995. "Demand Reduction and Inefficiency in Multi-Unit Auctions," Papers of Peter Cramton 98wpdr, University of Maryland, Department of Economics - Peter Cramton, revised 22 Jul 2002. [Downloadable!]
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