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How Auctioneers Set Ex-Ante and Ex-Post Reserve Prices in English Auctions

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  • Shachat, Jason
  • Tan, Lijia

Abstract

We compare two commonly used procurement English auction formats - the ex-ante reserve price and the ex-post reserve price, with symmetric and independently distributed private costs. Both formats are indirect implementations of Myerson's optimal mechanism. Both formats yield the same ex post payoffs when auctioneers optimally choose reserve prices. However, the optimal reserve prices follow two counter-intuitive prescriptions: optimal ex-ante reserve prices do not vary with the number of bidders, and optimal ex-post reserve prices are invariant to the realized auction prices. Anticipated regret, Davis et al (2011), and subjective posterior probability judgement, Shachat and Tan (2015), are two different approaches to rationalize observed auctioneers' choices that violate the two counter-intuitive prescriptions respectively. We generalized the latter model to one of Subjective Conditional Probabilities (SCP) which predicts optimal ex-ante reserve prices decreasing in the number of bidders and also predicts optimal ex-post reserve prices increasing in the realized auction prices. In our first experiment, in which costs follow a uniform distribution, we find two possible explanations to the experimental results. First, the auctioneers use the SCP model for both formats. Second, they use format-specific models. In our second experiment with a left-skewed cost distribution, we finally find that the SCP provides a unified behavioral model of how auctioneer set reserve prices in the two formats.

Suggested Citation

  • Shachat, Jason & Tan, Lijia, 2019. "How Auctioneers Set Ex-Ante and Ex-Post Reserve Prices in English Auctions," MPRA Paper 96225, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:96225
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    File URL: https://mpra.ub.uni-muenchen.de/96225/1/MPRA_paper_96225.pdf
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    References listed on IDEAS

    as
    1. Roger B. Myerson, 1981. "Optimal Auction Design," Mathematics of Operations Research, INFORMS, vol. 6(1), pages 58-73, February.
    2. Bulow, Jeremy & Klemperer, Paul, 1996. "Auctions versus Negotiations," American Economic Review, American Economic Association, vol. 86(1), pages 180-194, March.
    3. Jason Shachat & Lijia Tan, 2015. "An Experimental Investigation of Auctions and Bargaining in Procurement," Management Science, INFORMS, vol. 61(5), pages 1036-1051, May.
    4. Andrew M. Davis & Elena Katok & Anthony M. Kwasnica, 2011. "Do Auctioneers Pick Optimal Reserve Prices?," Management Science, INFORMS, vol. 57(1), pages 177-192, January.
    5. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer;Economic Science Association, vol. 10(2), pages 171-178, June.
    6. Drazen Prelec, 1998. "The Probability Weighting Function," Econometrica, Econometric Society, vol. 66(3), pages 497-528, May.
    7. Hu, Audrey, 2011. "How bidder's number affects optimal reserve price in first-price auctions under risk aversion," Economics Letters, Elsevier, vol. 113(1), pages 29-31, October.
    8. William Vickrey, 1961. "Counterspeculation, Auctions, And Competitive Sealed Tenders," Journal of Finance, American Finance Association, vol. 16(1), pages 8-37, March.
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    More about this item

    Keywords

    Procurement; English auction; ex-ante reserve price; ex-post reserve price; anticipated regret; subjective conditional probability;

    JEL classification:

    • C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models; Switching Regression Models
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions

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