Reservation price

In economics, a reservation (or reserve) price is a limit on the price of a good or a service. On the demand side, it is the highest price that a buyer is willing to pay; on the supply side, it is the lowest price a seller is willing to accept for a good or service. Reservation prices are commonly used in auctions, but the concept is extended beyond. A party's best alternative to a negotiated agreement (BATNA) is closely related to their reservation price. Once a party determines their BATNA, they can then calculate their reservation price. In negotiations surrounding the price of a particular good or service, the reservation price is a singular number. However, this is not the only situation in which reservation prices are seen. When multiple issues are being discussed, such as the size of salary and amount of benefits when applying for a new job position, the reservation price would be represented as a package where multiple requirements need to be met. In microeconomics, consumers set their reservation price as the highest price that they are willing to pay for goods or a service, while sellers set the smallest price at which they would sell. Similarly, in finance, the reservation price—also called the indifference price—is the value at which an investor would be willing to buy (or sell) a financial security given his or her particular utility function. The overlap between the reservation price of the buyer and the reservation price of the seller is often called the zone of possible agreement or the bargaining range; that is, the range of prices between which both buyer and seller would accept a deal. For example, $10 might be the lowest price a seller is willing to accept for a particular product, while a buyer might be willing to pay up to$15 for that product. The zone of possible agreement would be between $10 and$15. Reservation prices are commonly used in auctions, where the seller may or may not make it known what the lowest acceptable price is. Buyers—especially if by proxy—may have their own reservation price at which they are unwilling to further bid.