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Reserve prices in auctions as reference points

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  • S. Rosenkranz
  • P. Schmitz

Abstract

We consider second-price and first-price auctions in the symmetric independentprivate values framework. We modify the standard model by theassumption that the bidders have reference-based utility, where the reserveprice (minimum bid) plays the role of the reference point. In contrast to theusual result, the seller’s optimal reserve price is increasing in the number ofbidders. Even if an individual bidder perceives only a very small utility losswhen he has to pay more than the reserve price, the impact on the optimalreserve price can be strong when there are many bidders.

Suggested Citation

  • S. Rosenkranz & P. Schmitz, 2005. "Reserve prices in auctions as reference points," Working Papers 05-14, Utrecht School of Economics.
  • Handle: RePEc:use:tkiwps:0514
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    References listed on IDEAS

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    1. Rabin, Matthew, 2002. "A perspective on psychology and economics," European Economic Review, Elsevier, vol. 46(4-5), pages 657-685, May.
    2. Bulow, Jeremy & Klemperer, Paul, 1996. "Auctions versus Negotiations," American Economic Review, American Economic Association, vol. 86(1), pages 180-194, March.
    3. Amos Tversky & Daniel Kahneman, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, Oxford University Press, vol. 106(4), pages 1039-1061.
    4. Tirole, Jean, 2002. "Rational irrationality: Some economics of self-management," European Economic Review, Elsevier, vol. 46(4-5), pages 633-655, May.
    5. Krishna, Vijay, 2009. "Auction Theory," Elsevier Monographs, Elsevier, edition 2, number 9780123745071.
    6. Mailath, George J. & Zemsky, Peter, 1991. "Collusion in second price auctions with heterogeneous bidders," Games and Economic Behavior, Elsevier, vol. 3(4), pages 467-486, November.
    7. Menezes, Flavio M., 2008. "An Introduction to Auction Theory," OUP Catalogue, Oxford University Press, number 9780199275991.
    8. Graham, Daniel A & Marshall, Robert C, 1987. "Collusive Bidder Behavior at Single-Object Second-Price and English Auctions," Journal of Political Economy, University of Chicago Press, vol. 95(6), pages 1217-1239, December.
    9. Charles Zhoucheng Zheng, 2002. "Optimal Auction with Resale," Econometrica, Econometric Society, vol. 70(6), pages 2197-2224, November.
    10. Kamins, Michael A & Dreze, Xavier & Folkes, Valerie S, 2004. " Effects of Seller-Supplied Prices on Buyers' Product Evaluations: Reference Prices in an Internet Auction Context," Journal of Consumer Research, Oxford University Press, vol. 30(4), pages 622-628, March.
    11. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-291, March.
    12. McAfee, R Preston & McMillan, John, 1987. "Auctions and Bidding," Journal of Economic Literature, American Economic Association, vol. 25(2), pages 699-738, June.
    13. Steven A. Matthews, 1995. "A Technical Primer on Auction Theory I: Independent Private Values," Discussion Papers 1096, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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    More about this item

    Keywords

    Auction theory; reference-dependent utility; reserve prices;

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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