Semiparametric Estimation of the Optimal Reserve Price in First-Price Auctions

Until now the optimal reserve price in the independent private value paradigm has been expressed as a functional of the latent distribution of private signals which is by nature unobserved to the analyst. This feature has limited considerably the implementation of the optimal reserve price in practice. In this paper, we consider first-price auctions within the affiliated private values paradigm, which includes the independent private value case. We show that the seller’s expected profit can be written as a functional of the observed bids distribution. This can then be used to estimate directly the optimal reserve price from observed bids. Specifically, we propose a semiparametric extremum estimator for estimating consistently the optimal reserve price from observed bids. As an illustration, we consider the OCS wildcat auctions. Our empirical findings show that the optimal reserve price would generate significantly higher revenues and profits for the federal government. JEL Classification: C14, D44, L70