Low Reserve Prices in Auctions

A standard result in auction theory is that a seller’s profit-maximizing 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 paper 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.