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Temporary and Permanent Buyout Prices in Online Auctions

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  • Jérémie Gallien

    ()
    (Sloan School of Management, Massachusetts Institute of Technology, 50 Memorial Drive, Cambridge, Massachusetts 02142)

  • Shobhit Gupta

    ()
    (Operations Research Center, Massachusetts Institute of Technology, 77 Massachusetts Avenue, Cambridge, Massachusetts 02139)

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    Abstract

    Buyout options allow bidders to instantly purchase at a specified price an item listed for sale through an online auction. A temporary buyout option disappears once a regular bid is submitted, whereas a permanent option remains available until it is exercised or the auction ends. Such buyout price may be static and remain constant throughout the auction, or dynamic and vary as the auction progresses. We formulate a game-theoretic model featuring time-sensitive bidders with independent private values and Poisson arrivals but endogenous bidding times to answer the following questions: How should a seller set the buyout price (if at all)? What are the implications of using a temporary buyout option relative to a permanent one? What is the potential benefit associated with using a dynamic buyout price? For all buyout option types we exhibit a Nash equilibrium in bidder strategies, argue that this equilibrium constitutes a plausible outcome prediction, and study the problem of maximizing the corresponding seller revenue. Our numerical experiments suggest that when any participant is time sensitive, the seller may significantly increase his utility by introducing a buyout option, but that dynamic buyout prices may not provide a substantial advantage over static ones. Furthermore, whereas permanent buyout options yield higher predicted revenue than temporary options, they also provide additional incentives for late bidding and may therefore not be always more desirable.

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    File URL: http://dx.doi.org/10.1287/mnsc.1060.0650
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 53 (2007)
    Issue (Month): 5 (May)
    Pages: 814-833

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    Handle: RePEc:inm:ormnsc:v:53:y:2007:i:5:p:814-833

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    Related research

    Keywords: buyout option; online auctions; Nash equilibrium; dynamic pricing; time-sensitive markets; selling mechanisms; buyout prices;

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    Cited by:
    1. Grebe, Tim & Ivanova-Stenzel, Radosveta & Kröger, Sabine, 2010. "Buy-It-Now prices in eBay Auctions - The Field in the Lab," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 294, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    2. Olivier Armantier & Jean-Pierre Florens & Jean-Francois Richard, 2008. "Approximation of Nash equilibria in Bayesian games," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 23(7), pages 965-981.
    3. Jiang, Zhong-Zhong & Fang, Shu-Cherng & Fan, Zhi-Ping & Wang, Dingwei, 2013. "Selecting optimal selling format of a product in B2C online auctions with boundedly rational customers," European Journal of Operational Research, Elsevier, vol. 226(1), pages 139-153.
    4. Sun, Daewon & Li, Erick & Hayya, Jack C., 2010. "The optimal format to sell a product through the internet: Posted price, auction, and buy-price auction," International Journal of Production Economics, Elsevier, vol. 127(1), pages 147-157, September.
    5. Kevin Hasker & Robin Sickles, 2010. "eBay in the Economic Literature: Analysis of an Auction Marketplace," Review of Industrial Organization, Springer, vol. 37(1), pages 3-42, August.

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