Reserve prices in online auctions 1

In this paper, we investigate the effect of minimum bids in electronic auctions. The extensive use of auctions in electronic markets is explained by efficiency. In practice, auction houses and online auctioneers allow sellers to specify a number of different parameters when listing an item for auction. Among these are the level of the opening bid and the amount of a below which the seller will not sell the item. On the one hand, the reserve price restores the seller control on the auction results. On the other hand, it eliminates all the potential buyers whose offer would have been lower than this level. If all buyers' valuations are below the reserve price, the item isn't attributed. The introduction of reservation price in the auction introduces dramatic changes in the auctioneer behaviors. Our paper analyzes the effects of public and secret reserve prices, and the selection of reserve prices itself, in English auctions using laboratory experiments. In our experimental design, the seller decides to sell the item at a minimum price (Riley and Samuelson 1981.) which is either communicated to potential buyers (public reserve price) or not (secret reserve price). Then, the three bidders bid in an auction for an item. The introduction of a reserve price reduces the efficiency level of the auction, by generating conflicts, as well as the expected revenues of the seller and the buyers.