How Softening the Reserve not only Increases Efficiency but also Revenue

We investigate the performance of a (non-binding) soft reserve price in an experimental private value auction setting. A soft reserve price requires a minimal bid to participate in an auction but also allows for alternative offers by the bidders below this threshold. These alternative offers are only considered in case no bidder participates in the auction. We experimentally find, contrary to standard theory predictions, that a soft reserve price increases (1) efficiency and (2) revenue compared to a standard hard reserve price. Furthermore, a soft reserve price yields higher revenue than a first price auction.

The success of the non-binding reserve is driven by bidders’ eagerness to participate in the auction if their private valuation exceeds the soft reserve. In an additional treatment we demonstrate that sellers, given the choice, prefer a soft reserve price to a hard reserve price and have a good understanding of picking the level of the soft reserve.