Reserve Prices in Online Auctions:Theory and Evidence

The paper proposes a simple model of auctions with an impatient seller who chooses the reserve price and the buy-it-now (BIN) price to maximize revenue. The three main sales channels in the online auction (the pure auction, the BIN auction, and the fixed-price sale) are each shown to be an optimal solution for the sellers with certain degrees of time-preference. The theory also predicts that the optimal posted price for the fixed-price listing is greater than the optimal reserve price for the BIN auction, which in turn is greater than that for the pure auction. This prediction is confirmed by data from eBay's auction of iPods. Using the seller's inventory as a proxy for his degree of time-preference, the data also confirm the theoretical prediction that there is an inverse relationship between the optimal reserve price and the seller's time-discount factor.