On Absolute Auctions and Secret Reserve Prices

Abstract

From a theory viewpoint, the use of auctions with zero public reserve prices also called absolute auctions, or the use of auctions with secret reserve prices is somehow puzzling despite being common. By allowing that buyers differ in their processing of past data regarding how the participation rate varies with the auction format and how reserve prices are distributed when secret, we show in a competitive environment that these auction formats may endogenously emerge. We also analyze how buyers with various sophistications and sellers with various costs sort into the different formats, thereby offering a range of testable predictions. Alternative approaches are reviewed.

Keywords: absolute auctions, analogy-based expectations, competing auctions, endogenous entry, rational expectations, secret reserve prices

JEL Classification: D03, D44