Auctions Beat Posted Prices in a Small Market

In a model with two buyers and sellers we consider the choice of sales mechanism from three possibilities: posted prices, and auctions with and without reserve prices. With homogenous goods, sellers' expected revenues are highest when both sellers auction with reserve prices – 33% higher than if posting prices and 100% higher than if auctioning without reserve prices. When sellers can choose their mechanism before choosing prices, both sellers auction with a reserve price in the dominant strategy equilibrium. With heterogenous goods, the equilibrium with posted prices is inefficient (MONTGOMERY [1991]) but the equilibria with both types of auctions are efficient.