Auction theory: reserves vs. take-it-or-leave-it

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In summary, auction theory is a branch of microeconomics that studies the behavior of buyers and sellers in auctions. It examines how different auction formats, bidding strategies, and market conditions impact the outcome of an auction. There are two main types of auctions: reserves and take-it-or-leave-it auctions. Reserves auctions involve a minimum price set by the seller, while take-it-or-leave-it auctions offer the item at a fixed price. Reserves auctions are more commonly used, as they allow the seller to set a minimum acceptable price and ensure a fair market value for the item. In reserves auctions, bidders may be more conservative with their bids, while in take-it-or-leave-it auctions, they may be more aggressive. Information
  • #1
citrusvanilla
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hello,
i am under the impression that the take-it-or-leave-it ("buy it now") price that maximizes expected revenue to the seller is the same as the reserve price that maximizes revenue. this intuitively follows from setting both to the expected maximal realization of N players (for sake of problem, IID uniform on [0,1]). am i correct?

-justin
 
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  • #2
alternatively, by the same logic, the expected highest realization is not always 1/2, which is the maximum reserve price irrespective of the number of bidders, i.e. the highest realization of 100 players approaches 1
 

1. What is auction theory?

Auction theory is a branch of microeconomics that studies the behavior of buyers and sellers in auctions. It seeks to understand how different auction formats, bidding strategies, and market conditions affect the outcome of an auction.

2. What is the difference between reserves and take-it-or-leave-it auctions?

In a reserves auction, the seller sets a minimum price for the item being auctioned. Bids below this price are not accepted. In a take-it-or-leave-it auction, the seller offers the item at a fixed price and the buyer can either accept or reject the offer.

3. Which auction format is more commonly used?

Reserves auctions are more commonly used in practice, as they allow the seller to set a minimum acceptable price and ensure that the item is sold for a fair market value. Take-it-or-leave-it auctions are typically used in situations where the seller has a unique or highly desirable item, and wants to avoid the uncertainty of an auction.

4. How do bidders behave differently in reserves and take-it-or-leave-it auctions?

In reserves auctions, bidders may be more conservative with their bids, as they know they will not be accepted if they are below the reserve price. In take-it-or-leave-it auctions, bidders may be more aggressive with their bids, as they know they have a limited opportunity to secure the item at a fixed price.

5. How does information asymmetry affect auction outcomes in reserves and take-it-or-leave-it auctions?

In reserves auctions, information asymmetry can lead to strategic behavior by the seller, who may set a reserve price higher than the true market value of the item in order to extract more profit. In take-it-or-leave-it auctions, information asymmetry can lead to adverse selection, where the buyer may have more information about the true value of the item and can take advantage of the seller's fixed price offer.

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