Never Say Never: Optimal Exclusion and Reserve Prices with Expectations-Based Loss-Averse Buyers

TL;DR

This paper explores how expectations-based loss aversion influences optimal reserve prices in auctions and proposes mechanisms that better leverage bidders' attachment effects to increase seller revenue.

Contribution

It introduces new auction mechanisms that outperform traditional public reserve prices by exploiting bidders' loss aversion and attachment effects.

Findings

Optimal public reserve prices are lower with loss-averse bidders.

Mechanisms with secret reserve prices or two-stage processes yield higher revenue.

Bidders' attachment effects can be effectively leveraged to increase auction revenue.

Abstract

We study reserve prices in auctions with independent private values when bidders are expectations-based loss averse. We find that the optimal public reserve price excludes fewer bidder types than under risk neutrality. Moreover, we show that public reserve prices are not optimal as the seller can earn a higher revenue with mechanisms that better leverage the ``attachment effect''. We discuss two such mechanisms: i) an auction with a secrete and random reserve price, and ii) a two-stage mechanism where an auction with a public reserve price is followed by a negotiation if the reserve price is not met. Both of these mechanisms expose more bidders to the attachment effect, thereby increasing bids and ultimately revenue.