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Auctions with a Buy Price: The Case of Reference-Dependent Preferences

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Author Info
Nicholas Shunda (University of Connecticut)

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Abstract

In an auction with a buy price, the seller provides bidders with an option to end the auction early by accepting a transaction at a posted price. The "Buy-It-Now" option on eBay is a leading example of an auction with a buy price. This paper develops a model of an auction with a buy price in which bidders use the auction's reserve price and buy price to formulate a reference price. The model both explains why a revenue-maximizing seller would want to augment her auction with a buy price and demonstrates that the seller sets a higher reserve price when she can affect the bidders' reference price through the auction's reserve price and buy price than when she can affect the bidders' reference price through the auction's reserve price only. Introducing a small reference-price effect can shrink the range of buy prices bidders are willing to exercise. The comparative statics properties of bidding behavior are in sharp contrast to equilibrium behavior in other models where the existence and size of the auction's buy price have no effect on bidding behavior.

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Publisher Info
Paper provided by University of Connecticut, Department of Economics in its series Working papers with number 2007-42.

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Length: 37 pages
Date of creation: Oct 2007
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Handle: RePEc:uct:uconnp:2007-42

Note: I would like to thank Vicki Knoblauch for her insightful comments on earlier versions of this paper.
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Web page: http://www.econ.uconn.edu/
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Related research
Keywords: Auction; Buy price; Internet; Reference-dependence?;

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Find related papers by JEL classification:
D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software

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    Other versions:
  2. 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. [Downloadable!] (restricted)
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    Other versions:
  10. Subir Bose & Arup Daripa, 2007. "Optimal Sale: Auctions with a Buy-Now Option," Birkbeck Working Papers in Economics and Finance 0702, Birkbeck, Department of Economics, Mathematics & Statistics. [Downloadable!]
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    Other versions:
  13. Stephanie Rosenkranz & Patrick W. Schmitz, 2007. "Reserve Prices in Auctions as Reference Points," Economic Journal, Royal Economic Society, vol. 117(520), pages 637-653, 04. [Downloadable!] (restricted)
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    Other versions:
  15. René Kirkegaard & Per Baltzer Overgaard, 2008. "Buy-out prices in auctions: seller competition and multi-unit demands," RAND Journal of Economics, RAND Corporation, vol. 39(3), pages 770-789. [Downloadable!] (restricted)
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  21. John Wooders & Stanley S. Reynolds, 2004. "Auctions with a Buy Price," Econometric Society 2004 North American Summer Meetings 130, Econometric Society.
    Other versions:
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