What is a Reserve Price?
A reserve price, common to auctions, is the minimum amount that a seller will accept as the winning bid. Alternatively, it is less commonly known as the highest price a buyer is willing to pay for a good or service. The reserve price prevents a bidder who offers a price lower than what the owner will accept from winning the auction. The point at which the buyer and seller are no longer willing to negotiate is the walk away point. The auction's starting price tends to start lower than the reserve price to encourage bidding.
Understanding Reserve Price
Reserve prices are intended to protect the owner of an auctioned item from an unfavorable outcome. On sites like eBay, the reserve price is hidden, and until the reserve is met, the system will show "Reserve Not Met". Auction bidders dislike reserve prices because they reduce the possibility of winning the auction at a bargain price and because they create uncertainty as to the minimum price that must be paid to win the auction.
Sellers are not obligated to sell if the reserve price is not met.
Example of a Reserve Price
For example, an Ohio auction house has scheduled an auction to liquidate the equipment from a bankrupt manufacturing firm. One item on auction is a stamping press used to shape sheets of steel into automotive body panels. The auction firm sets a reserve price of $250,000 based on the recommendation of the bankruptcy trustee but opens the bidding at $100,000. After several bidders bring the price to $175,000, a firm that once competed with the bankrupt parts maker bids $200,000 for the press. No one else offers a higher bid, and the auctioneer removes the press from the auction because the reserve price is unmet.