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Optimal choice of a reserve price under uncertainty

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  • Kim, Dong-Hyuk

Abstract

The revenue function for a standard auction is typically asymmetric around the revenue maximizing reserve price. Thus, choosing a reserve price that is smaller than the revenue maximizing reserve price can result in a substantially different loss than choosing one that is larger by the same amount. Therefore, when the revenue function is unknown, it is important to consider uncertainty around the revenue function and its asymmetric structure. For this purpose, I propose a Bayesian decision rule and illustrate its typical revenue gains. I then apply the rule to the bid data from the U.S. timber sales.

Suggested Citation

  • Kim, Dong-Hyuk, 2013. "Optimal choice of a reserve price under uncertainty," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 587-602.
    • Handle: RePEc:eee:indorg:v:31:y:2013:i:5:p:587-602
    DOI: 10.1016/j.ijindorg.2013.10.003
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    Cited by:

    1. Daniel Quint, 2017. "Common Values and Low Reserve Prices," Journal of Industrial Economics, Wiley Blackwell, vol. 65(2), pages 363-396, June.
    2. Jayeeta Bhattacharya & Nathalie Gimenes & Emmanuel Guerre, 2019. "Semiparametric Quantile Models for Ascending Auctions with Asymmetric Bidders," Papers 1911.13063, arXiv.org, revised Sep 2020.
    3. Gaurab Aryal & Dong-Hyuk Kim, 2013. "Emprical Relevance of Ambiguity in First Price Auction Models," ANU Working Papers in Economics and Econometrics 2013-607, Australian National University, College of Business and Economics, School of Economics.
    4. Dominic Coey & Bradley J. Larsen & Kane Sweeney & Caio Waisman, 2021. "Scalable Optimal Online Auctions," Marketing Science, INFORMS, vol. 40(4), pages 593-618, July.
    5. Kim, Dong-Hyuk & Ratan, Anmol, 2022. "Disentangling risk aversion and loss aversion in first-price auctions: An empirical approach," European Economic Review, Elsevier, vol. 150(C).
    6. Gaurab Aryal & Hanna Charankevich & Seungwon Jeong & Dong-Hyuk Kim, 2021. "Procurements with Bidder Asymmetry in Cost and Risk-Aversion," Papers 2111.04626, arXiv.org, revised Jul 2022.
    7. Aryal, Gaurab & Grundl, Serafin & Kim, Dong-Hyuk & Zhu, Yu, 2018. "Empirical relevance of ambiguity in first-price auctions," Journal of Econometrics, Elsevier, vol. 204(2), pages 189-206.

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    More about this item

    Keywords

    Auction design; Bayesian decision theory; Revenue maximizing reserve price;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions

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