Reserve prices in auctions as reference points

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.