To Reveal or not to reveal: an investigation into the role of secret reserve prices in auctions

Why set a secret reserve price for an auction? What are the effects on the efficiency and the sale price of setting a secret reserve? According to conventional auction theory it is always in the seller's interest to publicly announce the reserve. To appreciate the role that secret reserves may play we propose to develop a model of auctions for which bidders' valuations have both private and common value components and where sellers have the option "to pass in" the object and resell it later. We hypothesize an important reason for a secret reserve price is to enable the seller to learn something about the common value of the object. We propose to test the predictions of our model on Australian wool auction data. As Australian governments are increasingly using auction style procedures to allocate various licenses and to sell government assets, the results from our study should provide important guidance to policy makers for their design and timing of auctions.