The impact of reserve prices in sealed bid federal timber sale auctions

In this article we examine the impact of reserve prices on timber revenues from federal timber sale auctions in North Carolina from a game-theoretic perspective by recognizing the effect of competition on optimal bid strategies. The empirical model endogenizes the number of bidders in a simultaneous-equations Tobit framework, and estimates the impacts of the reserve price on the probability that an offering will sell, as well as on the sale price given that the offering is sold, in the presence of strategic bidding behavior. Model results support the underlying game-theoretic structure. The number of bidders and the reserve price are both important in determining market value or high bid. Using a Wu-Hausman test, we reject exogeneity in the nu tuber of bidders. Importantly, a calculation of the change in market value given a change in the reserve price shows that increasing reserve prices will likely increase timber revenues on sales in North Carolina, thus providing evidence that reserve prices are not optimal. However, increasing the reserve price will decrease the proportion of sold sales which may not support nontimber objectives of the Forest Service.