Reserve Price

Reserve Price Meaning

Reserve price refers to the minimum price at which the seller of an item is ready to sell its item in an auction, below which he is not obliged to accept the deal, i.e., in case of such bidding if there reserve price is not meet in the auction, the seller is not bound to sell the item, and this price is not disclosed to the potential bidder during the process of the auction.

This is the most common in case of the auction of an item by the seller to the potential bidders. It is the minimum price during the process of auction of an item for sale at which the seller of the said item is ready to sell it. In case there is no bidding at the priceBidding At The PriceBid Price is the highest amount that a buyer quotes against the “ask price” (quoted by a seller) to buy particular security, stock, or any financial instrument. read more, which is equal to or higher than the reserve price, than the seller is not obliged to complete the deal, and he can reject the deal even to the highest bidder among all.

How does it work?

  • In case any items are to be sold by way of the auction, then the seller can ask for keeping the minimum price at which he can sell the item known as the reserve price (excluding the cases of no reserve auction). Now the auction firm, on request of the seller, will keep the reserve price of the item. This will generally be the hidden price except for the cases when the seller is ready to disclose the same to the potential buyers.
  • Now during the process of bidding, if the highest bidding exceeds the reserve price, then the auction will get complete, and the deal will be executed between the seller and the highest bidder. In this case, the seller is bound to complete the deal. However, in case if the highest bidding does not exceed the reserve price, then the seller is bound to complete the deal, and if the seller does not accept the deal, then it will not be executed.
Reserve-Price

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Source: Reserve Price (wallstreetmojo.com)

Reserve Price Example

For example, there was an auction to sell some of the items. During the process, the firm which was appointed as the auction firm sets the reserve price of the item to be $500,000 with the consultation with the seller of the item. As this price is kept hidden from the potential bidders, this price is not disclosed to anyone. The opening bidding price was $300,000. Now during the auction process, the highest bidding by one of the persons was $450,000. But the seller disagrees with selling the same at this price. Is the seller bound to sell?

In the present case, it is set by the auction firm of $500,000. In case all bids are less than the reserve price, then the seller of the item is not under any compulsion for executing the deal. So, if the seller disagrees with the deal, then it will end without its execution.

Purpose of Reserve Price

The main purpose of it is to safeguard the seller’s interest, where it will not be bound to sell its item at a price, which is lower than the reserve price. So if the seller is getting the last bidding, which is less than the maintained reserve price, then he is not obliged to execute it. He may simply reject, and the deal will be closed in that case.

Advantages

There are several different advantages are as follows:

  • When there is the reserve price during the process of the auction, it safeguards the interest of the owner from getting a lower amount of price against his item. This is so because in case even the highest bidding is less than the reserve price, then the seller is not under any compulsion to execute the deal.
  • It is not disclosed in advance to the potential bidder; it does not have any impact on the bidding process and bidding amount. However, the same can be disclosed in case the seller wants so on his own wish or with the requests of the potential bidders.

Disadvantages

There are several different disadvantages are as follows:

  • From the perspective of the buyers, it might not be a good concept because it reduces the chances of buyers getting low prices or bargain the deals, and hence they will not be benefited to a great extent.
  • As it is not compulsory to disclose the reserve price well in advance before the starting of the auction process, the buyers are not aware of this price. Due to this, even if a person bids the highest among all the potential bidders, he might not get the deal in the case that price is less than the reserve price. So, due to this uncertainty, many of the prospective buyers will not participate in the deal as they might find it a waste of their time as well as money.
  • It is not the same for each and every bidding process. So, the bidder has to read the terms and conditions thoroughly at the time of each such bidding.

Conclusion

Reserve price can be any minimum price below which the seller is not ready to sell his product to any of the potential buyers. It is generally kept hidden from the potential buyers until the seller decides to disclose the same. On the one hand, it protects the seller against the unfavorable outcome as it is not compulsory for the seller to execute the deal if the bidding ends at the price that is less than the reserve price.

On the other hand, from the buyer’s perspective, the concept of it is not an attractive one because with this, they might lose the bargain deal, and there are chances that the auction will go unsuccessful, leading to wastage of their time and money.

This has been a guide to what is a reserve price. Here we discuss how does reserve price in auction works with an example and purpose of it. We also discuss the advantages and disadvantages. You can learn more about financing from the following articles –

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