The Impact of Anticipated Regret on the Auction Seller's Optimal Reserve and Decision Making Task

Abstract

We examine how optimal reserve prices, and the market information that sellers need to collect, change when sellers in open English auctions anticipate regret from setting the reserve so high that their property does not sell. We find that this regret can create reserves that have multiple optima, depend on the number of bidders, and equal the seller's own valuation. Regret can also make the seller's payoff less sensitive to the reserve. These results do not occur for regretless sellers. These results complicate decision-making and information gathering for regretful sellers, who need to obtain more market information to set the optimal reserve compared to regretless sellers. We find that regret's impact depends on how the seller forms regret, and compare three types - constant, best possible outcome, and close miss regret. The extent of polarization in bidder valuations affects regret's impact on reserves for some regret forms but not for others. Vickrey auctions create additional opportunities for anticipated regret that raise optimal reserves compared to open English auctions, and cause reserves to depend on the number of bidders.

Keywords: auction, pricing, regret, Vickrey auction, decision making

JEL Classification: M31, M21