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We study reserve prices in auctions with independent private values whenbidders are expectations-based loss averse. We find that the optimal publicreserve price excludes fewer bidder types than under risk neutrality. Moreover,we show that public reserve prices are not optimal as the seller can earn ahigher revenue with mechanisms that better leverage the ``attachment effect''.We discuss two such mechanisms: i) an auction with a secrete and random reserveprice, and ii) a two-stage mechanism where an auction with a public reserveprice is followed by a negotiation if the reserve price is not met. Both ofthese mechanisms expose more bidders to the attachment effect, therebyincreasing bids and ultimately revenue.

Never Say Never: Optimal Exclusion and Reserve Prices with Expectations-Based Loss-Averse Buyers