Auctions with options for re-auction

Abstract

We examine the role of seller bidding and reserve prices in an infinitely repeated independent-private-value (IPV) ascending-price auction. The seller has a single object that she values at zero. At the end of any auction round, she may either sell to the highest bidder or pass-in the object and hold a new auction next period. New bidders are drawn randomly in each round. The ability to re-auction motivates a notion of reserve price as the option value of retaining the object for re-auctioning. Even in the absence of a mechanism with which to commit to a reserve price, the optimal 'secret' reserve is shown to exceed zero. However, despite the infinite repetition, there may be significant value to the seller from a binding reserve price commitment: the optimal binding reserve is higher than the optimal 'secret' reserve, and may be substantially so, even with very patient players. Furthermore, reserve price commitments may even be socially preferable at high discount factors. We also show that the optimal 'phantom' bidding strategy for the seller is revenue-equivalent to a commitment to an optimal public reserve price.