Reserve Price Meaning How Does It Work

Reserve Price Meaning

Reserve price refers to the minimum price at which the seller of an item is ready to sell in an auction, below which he is not obliged to accept the deal. In the case of such bidding, suppose their reserve price did not meet in the auction; the seller is not bound to sell the item. This price is undisclosed to the potential bidder during the auction process.

It is the most common in the case of the item auction by the seller to the potential bidders. It is the minimum price during the auction process of an item for sale at which the seller of the said item is ready to sell it. If there is no bidding at a price Bidding 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 equal to or higher than the reserve price, then 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?

If any items are to be sold by way of the auction, the seller can ask to keep the minimum price at which he can sell the object, known as the reserve price (excluding the cases of no reserve auction). The auction firm will keep the item’s reserve price at the seller’s request. That will generally be the hidden price except when the seller is ready to disclose the same to the potential buyers.If the highest bidding exceeds the reserve price during the bidding process, the auction will execute the deal between the seller and the highest bidder. In this case, the seller is bound to complete the pact. However, if the highest bidding does not exceed the reserve price, the seller is bound to complete the deal, and if the seller does not accept the agreement, it will not execute.

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Reserve Price Example

There was an auction to sell some of the items. During the process, the firm appointed as the auction firm sets the item’s reserve price to be $500,000 with consultation with the item’s seller. As this price is hidden from the potential bidders, this price is undisclosed to anyone. The opening bidding price was $300,000. 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?

The auction firm of $500,000 sets the present case. If all bids are less than the reserve price, then the item’s seller is not under any compulsion to execute the deal. So, if the seller disagrees with the agreement, it will end without execution.

Purpose of Reserve Price

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

Advantages

There are several different advantages as follows: –

A reserve price during the auction process safeguards the owner’s interest from getting a lower price against his item. That 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 undisclosed to the potential bidder. It does not impact the bidding process and amount. However, one can reveal the same if the seller wants on his wish or with the potential bidders’ requests.

Disadvantages

There are several different disadvantages as follows: –

From the buyers’ perspective, it might not be a good concept because it reduces the chances of buyers getting low prices or bargaining the deals. Hence, it will not benefit them to a great extent.As it is not compulsory to disclose the reserve price well before starting the auction process, the buyers are unaware of this price. Due to this, even if a person bids the highest among all the potential bidders, he might not get the deal if the price is less than the reserve price. So, due to this uncertainty, many prospective buyers will not participate in the agreement as they might find it a waste of their time and money.It is not the same for 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 the seller is not ready to sell his product to potential buyers. Generally, it is 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 a lower price than the reserve price.

On the other hand, from the buyer’s perspective, the concept is not attractive 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.