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Updating the Reserve Price in Common Value Auctions

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  • R. Preston McAfee
  • Daniel Vincent

Abstract

We consider a common value auction model with bidder participation determined jointly by nature and by bidder optimization. In this framework, an increase in the reserve price as two effects: it deters marginal bidders and it deters bidders from becoming informed. We then derive a test statistic for establishing when it is optimal to raise the reserve price. This statistic is independent of the distribution of valuations. We then apply the analysis to U.S. offshore oil sales and find evidence that the reserve price is dramatically too low.

Suggested Citation

  • R. Preston McAfee & Daniel Vincent, 1992. "Updating the Reserve Price in Common Value Auctions," Discussion Papers 977, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    • Handle: RePEc:nwu:cmsems:977
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    References listed on IDEAS

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    1. Milgrom, Paul R & Weber, Robert J, 1982. "A Theory of Auctions and Competitive Bidding," Econometrica, Econometric Society, vol. 50(5), pages 1089-1122, September.
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