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Frontiers of Economics in China

Front. Econ. China    2017, Vol. 12 Issue (3) : 341-370     DOI: 10.3868/s060-006-017-0015-4
Orginal Article |
Hidden Reserve Prices with Risk-Averse Bidders
Huagang Li1(), Guofu Tan2()
1. GE Capital, 201 High Ridge Rd., Stamford, CT 06905, USA; Sycamore Investment Services (Shanghai) Limited, Shanghai, China
2. Department of Economics, University of Southern California, Los Angeles, CA 90089-0253, USA
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In this paper, we provide an alternative explanation for why auctioneers often keep the reserve price hidden or secret. We consider a standard independent private values environment in which the buyers are risk-averse and the seller has private information about her valuation of the object to be auctioned. The seller uses a first-price sealed-bid auction mechanism combined with either an announced reserve price or a hidden reserve price. We compare the seller’s ex ante expected profits under these two policies and find that the optimal hidden reserve price policy generates higher expected profits for the seller when the buyers are fairly risk-averse under particular restrictions on buyers’ preferences and the distributions of private values. As the number of the buyers increases, the hidden reserve price is more likely to dominate. Numerical methods are used to demonstrate the generality of our main results.

Keywords first-price auctions      hidden reserve price      risk aversion     
Issue Date: 19 September 2017
 Cite this article:   
Huagang Li,Guofu Tan. Hidden Reserve Prices with Risk-Averse Bidders[J]. Front. Econ. China, 2017, 12(3): 341-370.
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