TLDR:

The bidding starts low to get bidders jumping in with great hopes of getting something for less than its true value, the reason they came to the auction. A lot of bidding encourages bidders to think the item may be worth more based on the behavior of other bidders. Bidders know there is a reserve, but they hope it is set low and that the seller just wants to get this thing sold, even below market value. But the seller wants to have a reserve price to protect them in case the bidding does not go high enough.

But starting the bidding high - at the seller's reserve price - signals that this bargain is not going to happen. Bidders figure that the winner will probably end up paying full market price and bidding may even go above that. So why even bid when they could get more selection for the same price at a store or a dealer.

Yes, it seems contradictory to encourage bidders into thinking they will win for less than true value, while assuring the seller that it won't sell for less than close to true value. But that's what auctions are all about. Auctions are about the game and the emotion. The psychology is very different from simple fixed-price selling.

More detailed explanation:

My experience with many auctions of high-dollar and low-dollar items: Auction buying is more emotional than rational. Auction buying is a game. Many people behave differently about their decisions than they do when buying an item at a set price off the shelf, with no one else competing for that one item.

Bidding needs to start very low to get people to make the first bid and pull in more early bids, to get the bids flowing and the energy going. Even if those bidders know they will be bidding higher to win.

Brisk bidding encourages people to think this item may be worth more based on the behavior of the other bidders. It can also trigger the competitive spirit of some buyers who want to win.

But the seller will be anxious about selling too far below market value, so the auctioneer allows the seller to set a reserve price below which the seller doesn't have to sell. (If higher bids aren't coming in, though, the seller may be asked if they are willing to let it go for below reserve.)

This example is how not having a reserve is likely to work: A car at a public auction has a probable market value of $10,000. The prospective bidders know that. The seller doesn't want to sell it for less than $9,000. If the auctioneer opens bidding at $9,000, there is a chance that very few bid and it doesn't go much higher. Or maybe no one bids. Because they are all sitting there thinking "Well heck I could just go down to the used car dealer and have more selection for the same thing at very near the same price."

Starting the bidding at close to market value is not why the buyers came to the auction. They came for 'bargains', even if that's not what they end up buying in the end.

Conversely, if the auctioneer opens the bidding at $5,000 (half of the reserve) lots of people jump in! Bidders tell themselves maybe no one else will bid it up very much, I'll get a $10,000 car for much less! They know there is a reserve but don't know what it is and think that maybe this seller will let it go for a low amount, just to have it sold.

Then auction psychology kicks in, and each subsequent bidder is thinking "Yes I'd give $5,200 for that" ... "Yes I'd give $7,000 for that" ... and so forth. The bids keep coming.

As the upward bidding continues to play out, the competitive spirit will take over in some people. Some others will revise their perceived value upward based on how they see others bidding. This is the crux of auctions.

But it doesn't happen if the bidding opens so high that there isn't room for much bidding before the market value of the item is reached. So the auctioneer allows the seller to set a reserve price, thus allowing the opening bid to be quite low so that lots of people will bid, without risking a sale at a super-low price.

A few bidders may even convince themselves that this car is worth having at possibly more than $10,000. Eventually the car that started bidding at $5,000 against a market value of $10,000 may finish up at $12,000, just from this psychology. That doesn't happen every time, of course, but it happens enough that people keep selling things at auction.

This is as true with online auctions as it is at in-person auctions.

Of course there are plenty of people for whom the auction dynamic makes no sense at all. They don't get emotionally caught up in it as others do. Low opening bids, reserves and bidding generally doesn't compute for them. They are not auction buyers! lol And that's ok, there are plenty of other ways to buy stuff. Auctions are for people who like auctions.

Auctions are a very different creature from ordinary selling at a fixed price. Something about human nature has people behaving very differently when bidding/buying at auctions. Auctions are fascinating to watch from a human behavior standpoint.