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A Risk Averse Seller in a Continuous Time Auction with a Buyout Option

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Author Info

  • Timothy Mathews

    (California State University-Northridge)

Abstract

An auction with a buyout option occurring over continuous time with rules similar to eBay’s “buy it now†option is analyzed. It is shown that a risk averse seller facing risk neutral bidders will choose a buyout price low enough so that the buyout option is exercised with positive probability in equilibrium. Further, when the seller is risk averse and bidders are risk neutral, allowing the seller to offer a buyout option results in an ex ante Pareto improvement, compared to a similar auction without such an option.

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Bibliographic Info

Article provided by Department of Economics, Universidade Federal de Pernambuco in its journal Brazilian Electronic Journal of Economics.

Volume (Year): 5 (2003)
Issue (Month): 2 (January)
Pages:

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Handle: RePEc:bej:issued:v:5:y:2002:i:2:mathews

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Related research

Keywords: Auctions; Internet; Buyout Option;

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References

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  1. Hanoch, G & Levy, Haim, 1969. "The Efficiency Analysis of Choices Involving Risk," Review of Economic Studies, Wiley Blackwell, vol. 36(107), pages 335-46, July.
  2. Timothy Mathews, 2004. "The Impact of Discounting on an Auction with a Buyout Option: a Theoretical Analysis Motivated by eBay’s Buy-It-Now Feature," Journal of Economics, Springer, vol. 81(1), pages 25-52, 01.
  3. Timothy Mathews, 2005. "Meaning Of 'More Risk Averse' When Preferences Are Over Mean And Variance," Manchester School, University of Manchester, vol. 73(1), pages 75-91, 01.
  4. Timothy Mathews & Brett Katzman, 2006. "The role of varying risk attitudes in an auction with a buyout option," Economic Theory, Springer, vol. 27(3), pages 597-613, 04.
  5. Borch, Karl, 1969. "A Note on Uncertainty and Indifference Curves," Review of Economic Studies, Wiley Blackwell, vol. 36(105), pages 1-4, January.
  6. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
  7. Feldstein, Martin S, 1969. "Mean-Variance Analysis in the Theory of Liquidity Preference and Portfolio Selection," Review of Economic Studies, Wiley Blackwell, vol. 36(105), pages 5-12, January.
  8. Budish, Eric B. & Takeyama, Lisa N., 2001. "Buy prices in online auctions: irrationality on the internet?," Economics Letters, Elsevier, vol. 72(3), pages 325-333, September.
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Citations

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Cited by:
  1. Kirkegaard, René & Overgaard, Per Baltzer, 2008. "Pre-auction offers in asymmetric first-price and second-price auctions," Games and Economic Behavior, Elsevier, vol. 63(1), pages 145-165, May.
  2. Shunda, Nicholas, 2009. "Auctions with a buy price: The case of reference-dependent preferences," Games and Economic Behavior, Elsevier, vol. 67(2), pages 645-664, November.
  3. Grebe, Tim & Ivanova-Stenzel, Radosveta & Kröger, Sabine, 2006. "How eBay Sellers set “Buy-it-now†prices - Bringing The Field Into the Lab," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 181, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  4. Axel Ockenfels & David Reiley & Abdolkarim Sadrieh, 2006. "Online Auctions," NBER Working Papers 12785, National Bureau of Economic Research, Inc.
  5. Stanley Reynolds & John Wooders, 2009. "Auctions with a buy price," Economic Theory, Springer, vol. 38(1), pages 9-39, January.

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