Anticipation of Auction Fever: Entry Decision, Reserve Price and the Choice of Auction Design

Abstract

This paper analyzes the entry decision of rational bidders who expect to experience auction fever in English auctions. It shows that nonparticipation decision reduces seller's expected profit and this effect may outweigh the positive effect of the auction fever. We analyze the choice between English and second-price sealed-bid auctions and the optimal reserve price in English auctions. We show that it might be optimal for the seller to set a reserve price below her own valuation of the object. Finally, we show that the order in which bidders place their bids matters and the first bidder always has an advantage.