Reserves, Regret, and Rejoicing in Open English Auctions

Abstract

Auction sellers usually must set a reserve, which is the lowest auction price that they will accept. I propose that anticipated regret and rejoicing affect reserves. Regret occurs when the highest bid exceeds the seller's value for the property but is still below the reserve. Rejoicing occurs when the reserve forces the winning bidder to pay a higher price. The impact of regret and rejoicing can be observed by examining sellers' learning over sequential auctions, particularly when they use a frequency heuristic. Results from an auction experiment with simulated bidders support the impact of anticipated regret and rejoicing on reserves.