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Reserve Price
Effect on the outcome and progress
of an auction

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Group Members

14 Ammara Majeed

15 Anum Jeelani

31 Mehak Nazeer

Presented to: Mr. Zain-ul-Abidean

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Contents

1 Auction & its Types

2 Mechanism of auction

3 Reserve Price Auction

4 Effect of Reserve Price on Auction

outcomes

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Auction Defined
In an auction, a seller offers an item for sale, but does not
establish a price

 Bidders
 Potential buyers

 Bids
 Prices bidders are willing to pay for an item

 Shill bidders
 Can artificially inflate the price of an item

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Why Auction?

Because many markets are imperfect and it is hard to

discover potential buyers’ true valuations of your asset.
Auctions help to discover this information

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Types of Auctions

Reverse – One buyer,

Forward – One seller,
many sellers
many buyers

Double – Many buyers,

many sellers (lower
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prices usually)
Mechanism of Auction
 English auction:
 bids are public announcements
 bid price rises until there are no further bids
 highest bid wins
 winner pays his bid

 Dutch auction (descending-price auctions ):

 auctioneer announces a high bid and then gradually lowers the
bid
 first buyer to accept wins and pays that price.

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Mechanism of Auction
 Sealed-bid first-price auction:
 bids are private information
 bids are made simultaneously
 highest bid wins
 winner pays his bid
 Second-price sealed-bid auction
 Highest bidder is awarded the item at the price bid by the
second-highest bidder
 Reserve Price Auction
 A seller specified bid level below which no sale is made.

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Reserve Price
 Lowest fixed price at which an item is offered at an auction
sale and
 at which it will be sold if no higher price is bid, or
 below which the seller is not obligated to accept the winning bid.

 eBay says "A reserve price is a tool sellers can use to

stimulate bidding on their item while reserving the right not to
sell below a price they have in mind."

 There is an extra listing fee for reserve price auctions which is

refunded if the item reaches its reserve price.

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Why have a Reserve Price?
 Many sellers have found having a low starting price
encourages people to bid, but they want to protect themselves
from selling an item for too little.

 For example,
U Want to sell an item = $100
Starting Price = $0.99, $5, $10
Reserve Price = $100

 Bidding will start at the lower price, but you won't be obliged to
sell the item unless the bidding reaches at least $100—your
reserve price.
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Case Study
 LAHORE: As many as 13 out of the 31 shops situated on the
ground floor of the newly constructed Park N Ride Plaza in Liberty
Market were sold through an open auction by the Lahore
Development Authority (LDA) on Wednesday.

 The reserve price for the shops was set at Rs 185.3 million,
however, they were sold at a price Rs 211.5 million.

 According to a statement issued by the LDA, a total of 62 bidders,

who had deposited pay orders worth 1 million each for participating
in the bid, took part in the auction and there was a serious
competition at the auction.
(Daily times, Jan 27,
2011)
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How it works:
 Reserve prices are secret—no one but the seller knows what the
reserve price for a given auction is. Buyers can, however, identify
reserve price auctions by the presence of either of the following two
phrases near the top of the item listing:

 "Reserve not met" indicates that a reserve price has been set for the
listing and that bidding has not yet exceeded this price.

 "Reserve met" indicates that a reserve price has been set for the listing
and that bidding has exceeded the reserve.

 Note: The reserve price option is only visible for online auction

format; it is not visible for fixed price or classified ad listings.
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Simple Auction
Suppose there are 2 buyers.
 The seller believes each buyer’s valuation is $20 with chance 1/2
and $50 with chance 1/2.
 I.e. with chance 1/4 each, the seller believes she faces buyer
valuations ($20,$20), ($20,$50), ($50,$20) and ($50,$50).
 Use a Simple auction.
 Bids must be raised by at least $1.
 With chance 1/4 each, winning bids will be $20, $21, $21 and $50 if
there is no reserve price.
 Seller’s expected revenue is
($20 + $21 + $21 + $50)/4 = $28

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Reserve Price
 With chance 1/4 each, the seller believes she faces buyer
valuations ($20,$20), ($20,$50), ($50,$20) and ($50,$50).
 Set a reserve price of $50.
 With chance 1/4 there will be no sale.
 With chance 3/4 the winning bid will be $50.
 Seller’s expected revenue is
 

 The reserve price causes an efficiency loss since, with chance 1/4,
there is no trade

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Submitting a bid in Reserve Price Auction

1) If the reserve has already been met, then your bid will be submitted
at one increment above the next highest competitor, in the same
manner as an auction without a reserve price.

2) If the reserve has not been met, and your maximum bid is also less
than the reserve, then your bid will be entered at one increment
above the next highest competitor.

3) If the reserve has not been met, but your maximum bid is enough
to meet the reserve, then your bid will be entered at exactly the
seller's reserve price.  If your maximum was above the seller's
reserve, then your proxy will defend your bid, up to your maximum.

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Minimum Bids and Reserve Prices
Minimum bids
--below which no bids will be accepted
Reserve prices
--if the highest bid doesn’t exceed the amount of the
reserve price, then no good will be sold
--indicated but not revealed to the bidders in most of
the sites

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Effects on the auction
--low-minimum bids, high-reserve prices
--generate interest
--build bidding momentum
--more opportunity to observe the bidding of others
--more aggressive bidding

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Minimum Bids and Reserve Prices

Effects on the auction --Overuse of high

reserve prices:

--make the winner upset sometime

--drive away bidders

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Affect of Reserve Price on
the progress and outcome of an auction
Implementing Reserve prices will:

 reduces the number of bidders,

 increases the frequency with which goods go unsold,
and
 Increases the revenues received on the goods
conditional on their having been sold.
(Reiley, 2005)

Field Experiments on the Effects of Reserve Prices in Auctions: More Magic on the Internet [Report] / 20
auth. Reiley David H.. - Tucson : University of Arizona, 2005.
Setting the right Reserve Price
 In setting the reserve price, you need to consider what is
the very least you can afford to accept for the property.
However, bear in mind that

 the lower the reserve price, the lower the guide price.
 And a low guide price leads to increased activity from potential
purchasers
 and can result in a higher price being achieved in the auction
room
 realistic and remains attractive to buyers.

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Conclusion
 You may set a hidden Reserve Price higher than the minimum
bid, which means you are not required to sell unless the high
bid meets or exceeds your reserve price amount.

 Your reserve price is not revealed to bidders - only that you

have set a reserve.

 The listing will also indicate whether the current bid has met
the reserve or not. If the high bid does meet or exceed your
reserve, then you are obligated to sell at the high bid amount.

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