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Optimal Sale: Auctions with a Buy-Now Option

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Author Info

  • Subir Bose
  • Arup Daripa

    (Department of Economics, Mathematics & Statistics, Birkbeck)

Abstract

We characterize the optimal selling mechanism in a scenario where similar goods are sold to “high end” buyers through a posted price and to “lower end” buyers through an auction. We show that the optimal mechanism involves an auction which is a standard optimal auction (Myerson (1981)) up to a critical type. Types above the critical type are pooled. Further, the allocation probability jumps up at the critical type and is the maximal possible for the pooled types. Therefore other than pooling at the top, the optimal mechanism allocates the object as efficiently as in a standard optimal auction. We show that posted price selling followed by auctions with a “temporary” buy-now option implements the optimal mechanism. Auctions with such an option are in widespread use on eBay.

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File URL: http://www.ems.bbk.ac.uk/research/wp/PDF/BWPEF0702.pdf
File Function: First version, 2007
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Bibliographic Info

Paper provided by Birkbeck, Department of Economics, Mathematics & Statistics in its series Birkbeck Working Papers in Economics and Finance with number 0702.

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Date of creation: Jan 2007
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Handle: RePEc:bbk:bbkefp:0702

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Related research

Keywords: Optimal Auction; eBay Auctions; Buy-Now Option; Posted Price; Price Discrimination;

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Cited by:
  1. 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.
  2. Nicholas Shunda, 2007. "Auctions with a Buy Price: The Case of Reference-Dependent Preferences," Working papers 2007-42, University of Connecticut, Department of Economics.

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