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Optimal Reservation Prices in Auctions

Dan Levin and James L. Smith
The Economic Journal
Vol. 106, No. 438 (Sep., 1996), pp. 1271-1283
Published by: Wiley on behalf of the Royal Economic Society
DOI: 10.2307/2235520
Stable URL: http://www.jstor.org/stable/2235520
Page Count: 13
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Optimal Reservation Prices in Auctions
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Abstract

The risk-neutral independent-private-values (IPV) auction model produces curious results regarding the use of reservation prices: no matter how many bidders, the seller should announce a fixed reservation price above his true value. This is notable since the seller gains by adopting an inefficient institution, and puzzling because it conflicts with common practice. We relax the IPV assumption, characterise optimal reservation prices in a richer class of auctions, and show that when information is correlated the seller's optimal reservation price converges to his true value, often monotonically and rapidly, as the number of bidders grows.

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