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The role of varying risk attitudes in an auction with a buyout option

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Author Info
Timothy Mathews ()
Brett Katzman ()

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Abstract

An auction with a buyout option is modelled. Such an option allows a bidder to purchase the item being auctioned at a pre-specified buyout price, instead of attempting to obtain the item through the traditional auction procedure. This analysis is motivated by internet auctions where such options are present. If all auction participants are risk neutral, the seller will choose a buyout price high enough so that the option is never exercised. However, a risk averse seller facing risk neutral bidders will choose a price low enough so that the option is exercised with positive probability. Further, if bidders are risk neutral and the seller is risk averse, this option may result in a Pareto improvement compared to a sealed bid second price auction. Copyright Springer-Verlag Berlin/Heidelberg 2006

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File URL: http://hdl.handle.net/10.1007/s00199-004-0571-8
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Publisher Info
Article provided by Springer in its journal Economic Theory.

Volume (Year): 27 (2006)
Issue (Month): 3 (04)
Pages: 597-613
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Handle: RePEc:spr:joecth:v:27:y:2006:i:3:p:597-613

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Related research
Keywords: Auctions; Internet; Buyout option.;

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  1. Stanley Reynolds & John Wooders, 2009. "Auctions with a buy price," Economic Theory, Springer, vol. 38(1), pages 9-39, January. [Downloadable!] (restricted)
    Other versions:
  2. Radosveta Ivanova-Stenzel & Sabine Kröger, 2005. "Price formation in a sequential selling mechanism," Discussion Papers 92, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich. [Downloadable!]
    Other versions:
  3. Shunda, Nicholas, 2009. "Auctioning with Aspirations: Keep Them Low (Enough)," MPRA Paper 16242, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  4. Thomas Andrews & Cynthia Benzing, 2007. "The Determinants of Price in Internet Auctions of Used Cars," Atlantic Economic Journal, International Atlantic Economic Society, vol. 35(1), pages 43-57, March. [Downloadable!] (restricted)
  5. Tim Grebe & Radosveta Ivanova-Stenzel & Sabine Kröger, 2006. "How eBay Sellers set “Buy-it-now” prices - Bringing The Field Into the Lab," Discussion Papers 181, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich. [Downloadable!]
  6. Quazi Shahriar, 2008. "Common Value Auctions with Buy Prices," Working Papers 0031, San Diego State University, Department of Economics. [Downloadable!]
  7. Ernan Haruvy & Peter Popkowski Leszczyc & Octavian Carare & James Cox & Eric Greenleaf & Wolfgang Jank & Sandy Jap & Young-Hoon Park & Michael Rothkopf, 2008. "Competition between auctions," Marketing Letters, Springer, vol. 19(3), pages 431-448, December. [Downloadable!] (restricted)
  8. Nicholas Shunda, 2007. "Auctions with a Buy Price: The Case of Reference-Dependent Preferences," Working papers 2007-42, University of Connecticut, Department of Economics. [Downloadable!]
  9. Subir Bose & Arup Daripa, 2009. "Optimal sale across venues and auctions with a buy-now option," Economic Theory, Springer, vol. 38(1), pages 137-168, January. [Downloadable!] (restricted)
  10. Yusuke Inami, 2008. "The Buy Price in Auctions with Discrete Type Distributions," KIER Working Papers 657, Kyoto University, Institute of Economic Research. [Downloadable!]
  11. Timothy Mathews, 2003. "A Risk Averse Seller in a Continuous Time Auction with a Buyout Option," Brazilian Electronic Journal of Economics, Department of Economics, Universidade Federal de Pernambuco, vol. 5(2), January. [Downloadable!]
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