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On Optimal Reservation Prices in Auctions

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  • Richard Engelbrecht-Wiggans

    (College of Commerce and Business Administration, University of Illinois, Champaign, Illinois 61820)

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    Abstract

    The theory of auction design examines how various factors affect the outcome of an auction. Most of the existing literature focuses on how varying the amount of information available to each bidder affects the bid-taker's expected revenue when all other factors remain constant. This paper studies how the bid-taker's expected revenue varies with changes in the auction format when such changes affect the number of bidders, and, in turn, the bidders' maximum value for the object being sold. Specifically, we examine how varying the reservation price or screening level affects the bid-taker's expected revenue though its effect on the number of bidders. For two simple examples, the losses associated with a reduced number of bidders outweighs any benefits that nontrivial reservation prices might have had in models with an exogonously set number of bidders.

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    File URL: http://dx.doi.org/10.1287/mnsc.33.6.763
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 33 (1987)
    Issue (Month): 6 (June)
    Pages: 763-770

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    Handle: RePEc:inm:ormnsc:v:33:y:1987:i:6:p:763-770

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    Related research

    Keywords: auctions; competitive bidding; decision analysis; value of information;

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    Cited by:
    1. Gary E. Bolton & Axel Ockenfels, 2008. "Does Laboratory Trading Mirror Behavior in Real World Markets? Fair Bargaining and Competitive Bidding on EBay," CESifo Working Paper Series 2241, CESifo Group Munich.
    2. Leandro Arozamena & Federico Weinschelbaum, 2010. "On favoritism in auctions with entry," Department of Economics Working Papers 2010-072, Universidad Torcuato Di Tella.
    3. GINSBURGH, Victor & LEGROS, Patrick & SAHUGUET, Nicolas, 2005. "How to win twice at an auction. On the incidence of commissions in auction markets," CORE Discussion Papers 2005005, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    4. Benjamin Lester & Ludo Visschers & Ronald Wolthoff, 2013. "Competing with Asking Prices," Working Papers tecipa-471, University of Toronto, Department of Economics.
    5. David Reiley, 2004. "Experimental evidence on the endogenous entry of bidders in internet auctions," Framed Field Experiments 00196, The Field Experiments Website.
    6. Chakraborty, Indranil & Kosmopoulou, Georgia, 2001. "Auctions with endogenous entry," Economics Letters, Elsevier, vol. 72(2), pages 195-200, August.
    7. GINSBURGH, Victor & LEGROS, Patrick & SAHUGUET, Nicolas, . "On the incidence of commissions in auction markets," CORE Discussion Papers RP -2253, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    8. Longstaff, Francis A & Han, Bing & Merrill, Craig, 2004. "Revenue Implications of Multi-Item Multi-Unit Auction Designs: Empirical Evidence from the U.S. Treasury Buyback Auctions," University of California at Los Angeles, Anderson Graduate School of Management qt7344v866, Anderson Graduate School of Management, UCLA.
    9. Deltas, George & Jeitschko, Thomas D., 2007. "Auction hosting site pricing and market equilibrium with endogenous bidder and seller participation," International Journal of Industrial Organization, Elsevier, vol. 25(6), pages 1190-1212, December.
    10. Engelbrecht-Wiggans, Richard & Nonnenmacher, Tomas, 1999. "A Theoretical Basis for 19th-Century Changes to the Port of New York Imported Goods Auction," Explorations in Economic History, Elsevier, vol. 36(3), pages 232-245, July.

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