Common Values and Low Reserve Prices

I show that the benefit of a high reserve price in a commonvalues ascending auction is lower than in the observationally-equivalent private values setting. Put another way, when bidders actually have common values, empirical estimation based on a private values model will overstate the value of a high reserve price. Via numerical examples, I show that this same ranking typically applies to the level of the optimal reserve price as well, and often to the benefit of any reserve price, not just a high one. With common values, the optimal reserve price can even be below the seller’s valuation, which is impossible with private values.