The Effect of Different Reserve Prices on Auction Outcomes

Abstract

To ensure that their item does not sell below a minimum value, auction sellers can set a reserve price or insert their own 'shill' bids. We present results from a controlled experiment in which we auctioned identical $20 Starbucks gift cards in order to test different price floors’ effects on sale prices and bidding activity. We find that all price floors decrease the number of bids and the number of bidders in an auction. Higher price floors increase the average sale price, but compared to a control group the difference is only significant at a binding level. In contrast, seller profits are maximized by setting no price floor, but we predict that the advantage of price floors will intensify with higher value items or items in thinner markets. We explain our results using the anchoring effect, selection effects and the eBay setup.

Keywords: Auctions, Reserve Price, Shill Bidding.

JEL Classification: D44