Anum, Mehak, Amara

8/7/2019 Anum, Mehak, Amara

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Reserve Price

Effect on the outcome and progressof an auction

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Group Members

Ammara Majeed14

Anum Jeelani15

Mehak Nazeer31

Presented to: Mr.Presented to: Mr. ZainZain--ulul--AbideanAbidean

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Contents

Auction & its Types1

Mechanism of auction2

Reserve PriceAuction3

Effect of Reserve Price onAuctionoutcomes

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Auction Defined

In an auction, a seller offers an item for sale, but does notestablish a price

Bidders

Potential buyers

Bids

Prices bidders are willing to pay for an item

Shill bidders

Can artificially inflate the price of an item

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Why Auction?

Because many markets are imperfect and it is hard to

discover potential buyers true valuations of your asset.Auctions help to discover this information

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Types of Auctions

Forward One seller,many buyers

Reverse One buyer,many sellers

Double Many buyers,many sellers (lower

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Mechanism of Auction English auction:

bids are public announcements

bid price rises until there are no further bids

highest bid wins

winner pays his bid

Dutch auction (descending-price auctions ):

auctioneer announces a high bid and then gradually lowers the

bid first buyer to accept wins and pays that price.

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Mechanism of Auction

Sealed-bid first-price auction:

bids are private information

bids are made simultaneously

highest bid wins

winner pays his bid

Second-price sealed-bid auction

Highest bidder is awarded the item at the price bid by thesecond-highest bidder

Reserve Price Auction

A seller specified bid level below which no sale is made.

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Reserve Price

Lowest fixed price at which an item is offered at an auctionsale and at which it will be sold if no higher price is bid, or

below which the seller is not obligated to accept the winning bid.

eBay says "A reserve price is a tool sellers can use tostimulate bidding on their item while reserving the right not tosell below a price they have in mind."

There is an extra listing fee for reserve price auctions which isrefunded if the item reaches its reserve price.

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Whyhave a Reserve Price?

Many sellers have found having a low starting priceencourages people to bid, but they want to protect themselvesfrom selling an item for too little.

For example,

U Want to sell an item = $100

Starting Price = $0.99, $5, $10

Reserve Price = $100

Bidding will start at the lower price, but you won't be obliged tosell the item unless the bidding reaches at least $100yourreserve price.

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Case Study

LAHORE: As many as 13 out of the 31 shops situated on theground floor of the newly constructed Park N Ride Plaza in LibertyMarket were sold through an open auction by the LahoreDevelopmentAuthority (LDA) on Wednesday.

The reserve price for the shops was set at Rs 185.3 million,however, they were sold at a price Rs 211.5 million.

According to a statement issued by the LDA, a total of 62 bidders,

who had deposited pay orders worth 1 million each for participatingin the bid, took part in the auction and there was a seriouscompetition at the auction.

(Daily times, Jan 27, 2011)

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How it works:

Reserve prices are secretno one but the seller knows what thereserve price for a given auction is. Buyers can, however, identifyreserve price auctions by the presence of either of the following two

phrases near the top of the item listing:

"Reserve not met" indicates that a reserve price has been set for thelisting and that bidding has not yet exceeded this price.

"Reserve met" indicates that a reserve price has been set for the listingand that bidding has exceeded the reserve.

Note: The reserve price option is only visible for online auctionformat; it is not visible for fixed price or classified ad listings.

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Simple Auction

Suppose there are 2 buyers.

The seller believes each buyers valuation is $20 with chance 1/2and $50 with chance 1/2.

I.e. with chance 1/4 each, the seller believes she faces buyer

valuations ($20,$20), ($20,$50), ($50,$20) and ($50,$50). Use a Simple auction.Use a Simple auction.

Bids must be raised by at least $1.

With chance 1/4 each, winning bids will be $20, $21, $21 and $50 ifthere is no reserve price.

Sellers expected revenue is($20 + $21 + $21 + $50)/4 = $28

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Reserve Price

With chance 1/4 each, the seller believes she faces buyer valuations($20,$20), ($20,$50), ($50,$20) and ($50,$50).

Set a reserve price of $50.Set a reserve price of $50.

With chance 1/4 there will be no sale.

With chance 3/4 the winning bid will be $50.

Sellers expected revenue is

The reserve price causes an efficiency loss since, with chance 1/4,there is no trade

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Submitting a bid in Reserve Price Auction

1) If the reserve has already been metreserve has already been met, then your bid will be submittedat one increment above the next highest competitor, in the samemanner as an auction without a reserve price.

2) If the reserve has not been metreserve has not been met, and your maximum bid is also lessthan the reserve, then your bid will be entered at one incrementabove the next highest competitor.

3) If the reserve has not been metreserve has not been met, but your maximum bid is enoughto meet the reserve, then your bid will be entered at exactly theseller's reserve price. If your maximum was above the seller'sreserve, then your proxy will defend your bid, up to your maximum.

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Minimum Bids and Reserve Prices

Minimum bids

--below which no bids will be accepted

Reserve prices--if the highest bid doesnt exceed the amount of the

reserve price, then no good will be sold

--indicated but not revealed to the bidders in most of

the sites

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Effects on the auction

--low-minimum bids, high-reserve prices

--generate interest

--build bidding momentum--more opportunity to observe the bidding of others

--more aggressive bidding

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Minimum Bids and Reserve Prices

EffectsEffects on the auctionon the auction ----Overuse of highOveruse of highreservereserve prices:prices:

--make the winner upset sometime

--drive away bidders

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Affect of Reserve Price on

the progress and outcome of an auction

Implementing Reserve prices will:

reduces the number of bidders,

increases the frequency with which goods go unsold,and

Increases the revenues received on the goodsconditional on their having been sold.

(Reiley, 2005)

Field Experiments on the Effects ofReserve Prices in Auctions: More Magic on the Internet [Report] /

auth. Reiley DavidH.. - Tucson : University ofArizona, 2005.

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Setting the right Reserve Price

In setting the reserve price, you need to consider what isthe very least you can afford to accept for the property.

However, bear in mind that

the lower the reserve price, the lower the guide price.

And a low guide price leads to increased activity from potentialpurchasers

and can result in a higher price being achieved in the auctionroom

realistic and remains attractive to buyers.

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Conclusion

You may set a hidden Reserve Price higher than the minimumbid, which means you are not required to sell unless the highbid meets or exceeds your reserve price amount.

Your reserve price is not revealed to bidders - only that youhave set a reserve.

The listing will also indicate whether the current bid has met

the reserve or not. If the high bid does meet or exceed yourreserve, then you are obligated to sell at the high bid amount.

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