Secret Reserve Prices by Uninformed Sellers

Abstract: This paper investigates a rationale for the use of secret reserve prices in auctions. If bidders are better informed than the seller about a common component of auction heterogeneity, the seller can allocate more efficiently by keeping her reserve price secret and revising it after bids are submitted. We build a model of a first-price auction under unobserved auction heterogeneity (imperfectly observed by the seller) that captures this rationale and derive conditions for identification. The model is estimated using data on French timber auctions, where the government uses an ex-ante secret reserve price (which can be revised down if no bid is above it). Counterfactual analysis shows that acquiring perfect signals about unobserved auction heterogeneity would allow the seller to increase revenue by 8.41% and surplus by 6.73%. Learning from submitted bids improves allocative efficiency albeit with some revenue loss.