What is Reserve Price
Reserve price is the minimum amount that the owner of an item up for auction will accept as the winning bid in the auction. The reserve price prevents the auction from being won by a bidder who offers a price lower than the item's owner will accept. The auction's starting price tends to start lower than the reserve price to encourage bidding.
BREAKING DOWN Reserve Price
Reserve prices are intended to protect the owner of an auctioned item from an unfavorable outcome. 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.
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 higher bids are offered and the auctioneer removes the press from the auction because the reserve price has not been met.