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Hidden Reserve Prices with Risk-Averse Bidders

Author

Listed:
  • Huagang Li

    (GE Capital, 201 High Ridge Rd., Stamford, CT 06905, USA; Sycamore Investment Services (Shanghai) Limited, Shanghai, China)

  • Guofu Tan

    (Department of Economics, University of Southern California, Los Angeles, CA 90089-0253, USA)

Abstract

In this paper, we provide an alternative explanation for why auctioneers often keep the reserve price hidden or secret. We consider a standard independent private values environment in which the buyers are risk-averse and the seller has private information about her valuation of the object to be auctioned. The seller uses a first-price sealed-bid auction mechanism combined with either an announced reserve price or a hidden reserve price. We compare the seller¡¯s ex ante expected profits under these two policies and find that the optimal hidden reserve price policy generates higher expected profits for the seller when the buyers are fairly risk-averse under particular restrictions on buyers¡¯ preferences and the distributions of private values. As the number of the buyers increases, the hidden reserve price is more likely to dominate. Numerical methods are used to demonstrate the generality of our main results.

Suggested Citation

  • Huagang Li & Guofu Tan, 2017. "Hidden Reserve Prices with Risk-Averse Bidders," Frontiers of Economics in China-Selected Publications from Chinese Universities, Higher Education Press, vol. 12(3), pages 341-370, September.
    • Handle: RePEc:fec:journl:v:12:y:2017:i:3:p:341-370
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    File URL: http://journal.hep.com.cn/fec/EN/10.3868/s060-006-017-0015-4
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    Citations

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    Cited by:

    1. Pasha Andreyanov & El Hadi Caoui, 2022. "Secret reserve prices by uninformed sellers," Quantitative Economics, Econometric Society, vol. 13(3), pages 1203-1256, July.
    2. Vasserman, Shoshana & Watt, Mitchell, 2021. "Risk aversion and auction design: Theoretical and empirical evidence," International Journal of Industrial Organization, Elsevier, vol. 79(C).
    3. Mylovanov, Tymofiy, 2005. "First-mover disadvantage," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 127, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    4. Muhammad Ejaz & Nisho Rani & Muhammad Ramzan Sheikh, 2023. "First Price Sealed-Bid Auctions with Bidders’ Heterogeneous Risk Behavior: An Adversarial Risk Analysis Approach," Decision Analysis, INFORMS, vol. 20(3), pages 231-241, September.
    5. Muhammad Ejaz & Stephen Joe & Chaitanya Joshi, 2021. "Adversarial Risk Analysis for Auctions Using Mirror Equilibrium and Bayes Nash Equilibrium," Decision Analysis, INFORMS, vol. 18(3), pages 185-202, September.

    More about this item

    Keywords

    first-price auctions; hidden reserve price; risk aversion;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions

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