Hidden Reserve Prices with Risk-Averse Bidders

In this paper, we provide an alternative explanation for why auctioneers often keep the reserve price hidden or secret. We consider a standard independent private values environment in which the buyers are risk-averse and the seller has private information about her valuation of the object to be auctioned. The seller uses a Þrst-price sealed-bid auction mechanism combined with either an announced reserve price or a hidden reserve price. We compare the seller’s ex ante expected proÞts under these two policies and Þnd that the optimal hidden reserve price policy generates higher expected proÞts for the seller when the buyers are fairly risk-averse under particular restrictions on buyers’ preferences and the distributions of private values. As the number of the buyers increases, the hidden reserve price is more likely to dominate. Numerical methods are used to demonstrate the generality of our main results. Journal of Economic Literature ClassiÞcation Number: D44.