Reserve Price Signaling with Public Information: Evidence from Online Auto Auctions

Abstract

This paper studies the problem of information provision in auctions. The linkage principle indicates that credibly revealing private information would benefit the seller, which implies that a seller should prefer a public reserve price to a secret one if the reserve price could reveal her private information. However, information revelation may backfire if the seller's information is not verifiable, and the reserve price works as a signaling device. In this paper, we consider an auction model in which a seller's choice of reserve price signals her private information about the object's quality. We show that such a signaling incentive could decrease the seller's profit and probability of sale in equilibrium, with a larger impact when the seller's private information is more precise relative to the public information announced by a third party. We estimate the reserve price signaling model using a novel dataset from a large online auto auction platform. We find that the signaling incentive could cost the seller 4% of her profit, and decrease the probability of sale by 15 percentage points. Counterfactual simulations suggest that a secret reserve price can improve both the seller's profit and probability of sale, especially when the signaling incentive is strong. Our findings support the prevalent use of secret reserve prices in practice, contrary to the predictions of linkage principle.