Reservation price

In microeconomics, the reservation (or reserve) price is the maximum price a buyer is willing to pay for a good or service; or, conversely, the minimum price at which a seller is willing to sell a good or service. Reservation prices are commonly used in auctions.

Reservation prices vary for the buyer according to their disposable income, their desire for the good, and the prices of, and their information about substitute goods. Reservation demand is a name for the schedule of reservation prices at which a seller would be willing to sell different quantities of the good in question.

The reservation price is used to help calculate the consumer surplus or the producer surplus with reference to the equilibrium price.

Just as a consumer has an incentive to search for a low price when purchasing a good, a worker has an incentive to search for a high wage when looking for a job. The lowest wage the worker is willing to accept is that worker's reservation wage.

In negotiation, the reservation price is the point beyond which a negotiator is ready to walk away from a negotiated agreement. Taking a typical business negotiation as an example: a seller's reservation price is the least amount (the minimum) or bottom line the seller is prepared to accept. A buyer would want to pay no more (the maximum) or top line that the buyer is willing to pay. Reservation price is often referred to as the ‘walk away’ point.^[1]

[edit] References

1. ^ Definition of Reservation Price in business negotiations | Negotiation Experts

Ian Steedman (1987). "Reservation price and reservation demand," The New Palgrave: A Dictionary of Economics, v. 4, pp. 158-59.

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