Reserve Price: What It Means and How It Works in Auctions

What Is a Reserve Price?

Common to auctions, a reserve price or a reservation price 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. A reserve price is not to be confused with an opening bid, which is the suggested starting bid for an auction.

Key Takeaways

  • A reserve price is a minimum price that a seller would be willing to accept from a buyer.
  • In an auction, the seller is not typically required to disclose the reserve price to potential buyers.
  • If the reserve price is not met, the seller is not required to sell the item, even to the highest bidder.
  • As a result, some buyers dislike reserve prices as they encourage bidding at levels that may not win.

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."

When the reserve price is met, the system will display "Reserve Met." Once a bidder submits a bid that has met the reserve price, the bid is binding, obligating the buyer to purchase the auction item or service and obligating the seller to sell the item or service.

Sellers can disclose the reserve price in their descriptions or upon request from potential buyers. Some auction bidders are opposed to 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.

Some auction companies and sites (e.g., eBay) allow sellers to set reserve prices for an additional fee as it is considered an optional feature, and some allow for the reserve price to be changed while an auction is active. If changes are allowed, the seller can only reduce the reserve price. When a reserve price is disallowed, such as with an absolute auction, owners are typically prohibited from bidding on their items as doing so would allow them to manipulate the process.

All auctions are not the same. The parties to an auction should thus carefully review the rules and guidelines before entering into a selling agreement or submitting bids.

Sellers are not obligated to sell if the reserve price is not met.

Reserve Price vs. Opening Bid

Oftentimes, the reserve price and the opening price/bid are used interchangeably. However, they are not the same. While the reserve price is the minimum price a seller is willing to accept, the opening bid is the amount suggested to start bidding. Bidders are not obligated to accept the opening bid, and if an item receives no bids, the auctioneer will lower the starting/opening bid price.

If an opening bid is too high, it may cause bidders to become disinterested even if the item price is subsequently lowered. It's like listing a residential property for sale. If the price is too high, many potential buyers become disinterested, and regaining their interest is difficult even when the price is lowered. Therefore, professional auctioneers suggest starting with a lower starting bid to gain interest. Once bidders are interested and begin bidding, they are invested and will likely continue until a higher price is secured.

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.