Manipulating Information Revelation with Reserve Prices

Abstract

We introduce a novel motive for the use of a reserve price as an instrument to raise auction revenues in ascending auctions. The effect that we stress is of inducing coarser information aggregation. The reserve price may prevent information revelation because bidders cannot precisely observe at which price other bidders leave the auction. In simple settings where valuation functions are not symmetric, this may increase the expected revenue of the auction. To illustrate this motive, we exhibit an example in which the use of a reserve price increases revenue even though there are always at least two bidders active for prices higher than the reserve price.