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Low Reserve Prices in Auctions

Author

Listed:
  • Audrey Hu
  • Steven A Matthews
  • Liang Zou

Abstract

A standard result in auction theory is that a seller’s profit-maximising reserve price is no less than his own value for the good. In practice, however, reserve prices often appear to be less than sellers’ values. This article revisits the theory of optimal reserves in the context of second-price auctions. The main result is that an optimal reserve is less than the seller’s value if the bidders are sufficiently risk averse and if their values are sufficiently interdependent. The resulting outcome may approximate that of an auction without reserve, i.e., an absolute auction.

Suggested Citation

  • Audrey Hu & Steven A Matthews & Liang Zou, 2019. "Low Reserve Prices in Auctions," The Economic Journal, Royal Economic Society, vol. 129(622), pages 2563-2580.
    • Handle: RePEc:oup:econjl:v:129:y:2019:i:622:p:2563-2580.
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    File URL: http://hdl.handle.net/10.1093/ej/uez004
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    Cited by:

    1. Vasserman, Shoshana & Watt, Mitchell, 2021. "Risk aversion and auction design: Theoretical and empirical evidence," International Journal of Industrial Organization, Elsevier, vol. 79(C).
    2. Marilyn Pease & Mark Whitmeyer, 2026. "On Risk Aversion in Auctions," Papers 2603.09683, arXiv.org.
    3. Balzer, Benjamin & Rosato, Antonio, 2025. "Never say never: Optimal exclusion and reserve prices with expectations-based loss-averse buyers," Journal of Economic Theory, Elsevier, vol. 228(C).
    4. Meng Zhang & Shulin Liu, 2022. "Effects of risk aversion in auctions without and with default," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(3), pages 731-737, April.
    5. Kazumura, Tomoya & Mishra, Debasis & Serizawa, Shigehiro, 2020. "Strategy-proof multi-object mechanism design: Ex-post revenue maximization with non-quasilinear preferences," Journal of Economic Theory, Elsevier, vol. 188(C).
    6. Tristan Gagnon-Bartsch & Marco Pagnozzi & Antonio Rosato, 2021. "Projection of Private Values in Auctions," American Economic Review, American Economic Association, vol. 111(10), pages 3256-3298, October.
    7. Nathalie Gimenes & Tonghui Qi & Sorawoot Srisuma, 2025. "Identification and Estimation of Seller Risk Aversion in Ascending Auctions," Papers 2509.19945, arXiv.org, revised Feb 2026.
    8. Kirkegaard, René, 2022. "Efficiency in asymmetric auctions with endogenous reserve prices," Games and Economic Behavior, Elsevier, vol. 132(C), pages 234-239.
    9. Suzdaltsev, Alex, 2022. "Distributionally robust pricing in independent private value auctions," Journal of Economic Theory, Elsevier, vol. 206(C).

    More about this item

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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