IDEAS home Printed from https://ideas.repec.org/a/bej/issued/v5y2002i2mathews.html
   My bibliography  Save this article

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

Author

Listed:
  • 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.

Suggested Citation

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

    Download full text from publisher

    File URL: http://www.beje.decon.ufpe.br/v5n2/mathews.pdf
    File Function: Full text
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. M. S. Feldstein, 1969. "Mean-Variance Analysis in the Theory of Liquidity Preference and Portfolio Selection," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 36(1), pages 5-12.
    2. K. Borch, 1969. "A Note on Uncertainty and Indifference Curves," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 36(1), pages 1-4.
    3. G. Hanoch & H. Levy, 1969. "The Efficiency Analysis of Choices Involving Risk," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 36(3), pages 335-346.
    4. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
    5. Baron, David P, 1977. "On the Utility Theoretic Foundations of Mean-Variance Analysis," Journal of Finance, American Finance Association, vol. 32(5), pages 1683-1697, December.
    6. 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, January.
    7. Bigelow, John Payne, 1993. "Consistency of mean-variance analysis and expected utility analysis : A complete characterization," Economics Letters, Elsevier, vol. 43(2), pages 187-192.
    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.
    9. Timothy Mathews & Brett Katzman, 2006. "The role of varying risk attitudes in an auction with a buyout option," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 27(3), pages 597-613, April.
    10. 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, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. 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.
    2. 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.
    3. Jérémie Gallien & Shobhit Gupta, 2007. "Temporary and Permanent Buyout Prices in Online Auctions," Management Science, INFORMS, vol. 53(5), pages 814-833, May.
    4. Stanley Reynolds & John Wooders, 2009. "Auctions with a buy price," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 38(1), pages 9-39, January.
    5. Zhonghao Shui, 2023. "Rejection prices and an auctioneer with non-monotonic utility," International Journal of Game Theory, Springer;Game Theory Society, vol. 52(3), pages 925-951, September.
    6. Axel Ockenfels & David Reiley & Abdolkarim Sadrieh, 2006. "Online Auctions," NBER Working Papers 12785, National Bureau of Economic Research, Inc.
    7. Hidvegi, Zoltan & Wang, Wenli & Whinston, Andrew B., 2006. "Buy-price English auction," Journal of Economic Theory, Elsevier, vol. 129(1), pages 31-56, July.
    8. 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, September.
    9. 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.
    10. 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, January.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Heller, Yuval & Schreiber, Amnon, 2020. "Short-term investments and indices of risk," Theoretical Economics, Econometric Society, vol. 15(3), July.
    2. Merton, Robert, 1990. "Capital market theory and the pricing of financial securities," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 1, chapter 11, pages 497-581, Elsevier.
    3. Bigman, David, 1995. "Approximation methods for ranking risky investment alternatives," Agricultural Economics, Blackwell, vol. 12(1), pages 1-9, April.
    4. Yuval Heller & Amnon Schreiber, 2020. "Short-Term Investments and Indices of Risk," Papers 2005.06576, arXiv.org.
    5. 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.
    6. He, Ying & Dyer, James S. & Butler, John C. & Jia, Jianmin, 2019. "An additive model of decision making under risk and ambiguity," Journal of Mathematical Economics, Elsevier, vol. 85(C), pages 78-92.
    7. Axel Ockenfels & David Reiley & Abdolkarim Sadrieh, 2006. "Online Auctions," NBER Working Papers 12785, National Bureau of Economic Research, Inc.
    8. Lean, Hooi Hooi & McAleer, Michael & Wong, Wing-Keung, 2010. "Market efficiency of oil spot and futures: A mean-variance and stochastic dominance approach," Energy Economics, Elsevier, vol. 32(5), pages 979-986, September.
    9. Kong‐Pin Chen & Szu‐Hsien Ho & Chi‐Hsiang Liu & Chien‐Ming Wang, 2017. "The Optimal Listing Strategies In Online Auctions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 58(2), pages 421-437, May.
    10. Al-Khazali, Osamah, 2014. "Revisiting fast profit investor sentiment and stock returns during Ramadan," International Review of Financial Analysis, Elsevier, vol. 33(C), pages 158-170.
    11. Shunda, Nicholas, 2009. "Auctioning with Aspirations: Keep Them Low (Enough)," MPRA Paper 16242, University Library of Munich, Germany.
    12. Chen, Kong-Pin & Lai, Hung-pin & Yu, Ya-Ting, 2018. "The seller's listing strategy in online auctions: Evidence from eBay," International Journal of Industrial Organization, Elsevier, vol. 56(C), pages 107-144.
    13. Jong-Rong Chen & Kong-Pin Chen & Chien-Fu Chou & Ching-I Huang, 2013. "A Dynamic Model of Auctions with Buy-It-Now: Theory and Evidence," Journal of Industrial Economics, Wiley Blackwell, vol. 61(2), pages 393-429, June.
    14. Hooi Hooi Lean & Michael McAleer & Wing-Keung Wong, 2010. "Market Efficiency of Oil Spot and Futures: A Stochastic Dominance Approach," CIRJE F-Series CIRJE-F-705, CIRJE, Faculty of Economics, University of Tokyo.
    15. Merton, Robert C., 1993. "On the microeconomic theory of investment under uncertainty," Handbook of Mathematical Economics, in: K. J. Arrow & M.D. Intriligator (ed.), Handbook of Mathematical Economics, edition 4, volume 2, chapter 13, pages 601-669, Elsevier.
    16. George Samartzis & Nikitas Pittis, 2022. "On The Equivalence Of The Mean Variance Criterion And Stochastic Dominance Criteria," Papers 2211.01240, arXiv.org.
    17. Shlomo Yitzhaki, 2003. "Gini’s Mean difference: a superior measure of variability for non-normal distributions," Metron - International Journal of Statistics, Dipartimento di Statistica, Probabilità e Statistiche Applicate - University of Rome, vol. 0(2), pages 285-316.
    18. Ivanova-Stenzel, Radosveta & Kröger, Sabine, 2008. "Price formation in a sequential selling mechanism," Journal of Economic Behavior & Organization, Elsevier, vol. 67(3-4), pages 832-843, September.
    19. Meyer, Jack, 1988. "Two Moment Decision Models And Expected Utility Maximization: Some Implications For Applied Research," Regional Research Projects > 1988: S-180 Annual Meeting, March 20-23, 1988, Savannah, Georgia 272846, Regional Research Projects > S-180: An Economic Analysis of Risk Management Strategies for Agricultural Production Firms.
    20. Toshihiro Tsuchihashi & Tomohisa Okada, 2025. "Buyout decisions of level-k bidders in second-price auctions," Theory and Decision, Springer, vol. 98(2), pages 225-248, March.

    More about this item

    Keywords

    Auctions; Internet; Buyout Option;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bej:issued:v:5:y:2002:i:2:mathews. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Jose Ricardo Nogueira (email available below). General contact details of provider: https://edirc.repec.org/data/dufpebr.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.