Working Paper: CEPR ID: DP4264
Authors: Stephanie Rosenkranz; Patrick Schmitz
Abstract: We consider second-price and first-price auctions in the symmetric independent private values framework. We modify the standard model by the assumption that the bidders have reference-based utility, where the reserve price (minimum bid) plays the role of the reference point. In contrast to the usual result, the seller?s optimal reserve price is increasing in the number of bidders. Even if an individual bidder perceives only a very small utility loss when they have to pay more than the reserve price, the impact on the optimal reserve price can be strong when there are many bidders.
Keywords: auction theory; behavioural economics; reference points; reserve prices
JEL Codes: D44; D81; D82
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| number of bidders (n) (D44) | optimal reserve price (D44) |
| strength of the reference point effect (D91) | optimal reserve price (D44) |
| number of bidders (n) (D44) | expected value of the highest bid (D44) |
| reference point effect (G41) | willingness of bidders to pay above the reference point (D44) |