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Absolute auctions and secret reserve prices: Why are they used?

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Absolute auctions and secret reserve prices: Why are they used? Philippe Jehiel∗and Laurent Lamy† Abstract Absolute auctions, i.e. auctions with a zero public reserve price, and auctions with secret reserve prices are frequently used by various auction sites. However, it is hard to find a rationale for these formats. By introducing the possibility that buyers differ in their understanding of how the participation rate varies with the auction format, and how reserve prices are distributed when secret, we show in a competitive environ- ment that these auction formats may endogenously emerge. We also analyze how the objects of various quality sort into the different auction formats in equilibrium and the cognitive characteristics of the buyers who participate in the various auctions, thereby offering a range of testable predictions. Keywords: Auctions, absolute auctions, secret reserve prices, endogenous entry, ratio- nal expectations, cognitive limitations. JEL classification: D03, D44 1 Introduction EBay provides a wonderful large-scale laboratory for the analysis of the kind of auction formats and instruments that are used by real sellers to sell their goods. One observation that can be made is that auctions with no or very low reserve prices are frequently used even in cases in which it would seem that the reservation value of the seller is above the chosen reserve price.1 Another is that secret reserve prices are also often used, and especially for items of high quality (Bajari and Hortaçsu, 2003). Furthermore, field experiments have shown that those formats may be profitable for the seller depending on the characteristics of the good.2 ∗Paris School of Economics and University College London. e-mail: [email protected] †Paris School of Economics. e-mail: [email protected] 1See the survey in Hasker and Sickles (2010). 2For collectible trading cards, Reiley (2006) finds that absolute auctions raise 25% higher revenue than auctions with a reserve ap

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