Posted in Marketing and Strategy Terms, Total Reads: 516
Definition: Reserve Price
The reserve price is the lowest price specified which is acceptable by the seller for an item sold at auction. It's the price at which the item will be sold if no higher bids are placed, also seller has to power to cancel the auction if bids are lower than the reserved price.
Reserve prices are mainly designed to protect the seller from an unfavorable outcome in an auction. However, auction bidders dislike reserve prices because they are unable to bargain and their chances of winning the auction are reduced due to uncertainty over the reserve price.
Just as a buyer has an incentive to buy an item at lowest price, a seller has an incentive to sell it at the highest possible price.
Even buyers have a reservation price which is nothing but the maximum amount they are ready to pay for good or service. Reservation prices vary according to the disposable income of the buyer, their desire for the good and substitute goods in the market.
For example: On eBay seller has set a reserve price of Rs. 1850 for Behmani Sultan Tajuddin’s silver coin. A buyer cannot buy this coin at a price lower than the set limit.
The reservation price is also called as indifference price in finance. It is the value at which an investor is willing to buy or sell a financial security.