A Field Guide to Personalized Reserve Prices

Abstract

We study the question of setting and testing reserve prices in single item auctions when the bidders are not identical. At a high level, there are two generalizations of the standard second price auction: in the lazy version we first determine the winner, and then apply reserve prices; in the eager version we first discard the bidders not meeting their reserves, and then determine the winner among the rest. We show that the two versions have dramatically different properties: lazy reserves are easy to optimize, and A/B test in production, whereas eager reserves always lead to higher welfare, but their optimization is NP-complete, and naive A/B testing will lead to incorrect conclusions. Despite their different characteristics, we show that the overall revenue for the two scenarios is always within a factor of 2 of each other, even in the presence of correlated bids. Moreover, we prove that the eager auction dominates the lazy auction on revenue whenever the bidders are independent or symmetric. We complement our theoretical results with simulations on real world data that show that even suboptimally set eager reserve prices are preferred from a revenue standpoint.