Reserve Price Signaling with Public Information: Evidence from Online Auto Auctions

Abstract

This paper considers an auction model in which a seller's choice of reserve price signals her private information about the object's quality. We show that the signaling incentive would lower the seller's payoff and the probability of sale. We estimate the model using a novel dataset from a large online auto auction platform. Counterfactual simulations suggest that a secret reserve price could shut down the signaling incentive and improve both the seller's payoff and the probability of sale, which supports the prevalent use of secret reserve prices in practice.

Keywords: auction, reserve price, signaling, public information, unobserved heterogeneity

JEL Classification: D44, D82, L15, L81