What is the role of a reserve price in an auction?

The role of a reserve price in an auction is to protect the seller from selling their item for less than a predetermined minimum value. When a reserve price is set, it acts as a hidden threshold that must be met or exceeded for the item to be sold. If the bidding does not reach this reserve price, the auctioneer has the right not to sell the item, ensuring that the seller does not incur losses or sell the item at an unacceptable low price.

This mechanism is important in maintaining the seller’s interests and encouraging legitimate bidding. For instance, if a seller believes their item is worth at least $500, they can set a reserve price of $500. If bidding concludes at $450, the item will not be sold, and the seller will have the opportunity to try again or revise their expectations.

In contrast, establishing an upper limit on bids or eliminating bidding wars addresses different aspects of the auction process and does not primarily serve the seller's interest in securing a minimum sale amount. Similarly, while guaranteeing the auctioneer's commission is a function of their overall compensation structure, it is not directly related to the function of a reserve price.