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Risk aversion and optimal reserve prices in first- and second-price auctions

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  • Hu, Audrey
  • Matthews, Steven A.
  • Zou, Liang

Abstract

We analyze the effects of buyer and seller risk aversion in first- and second-price auctions in the classic setting of symmetric and independent private values. We show that the seller's optimal reserve price decreases in his own risk aversion, and more so in the first-price auction. The reserve price also decreases in the buyers' risk aversion in the first-price auction. Thus, greater risk aversion increases ex post efficiency in both auctions - especially that of the first-price auction. At the interim stage, the first-price auction is preferred by all buyer types in a lower interval, as well as by the seller.

Suggested Citation

  • Hu, Audrey & Matthews, Steven A. & Zou, Liang, 2010. "Risk aversion and optimal reserve prices in first- and second-price auctions," Journal of Economic Theory, Elsevier, vol. 145(3), pages 1188-1202, May.
    • Handle: RePEc:eee:jetheo:v:145:y:2010:i:3:p:1188-1202
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    More about this item

    Keywords

    First-price auction Second-price auction Risk aversion Reserve price;

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions

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