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An experimental study of auctions with a buy price under private and common values

  • Shahriar, Quazi
  • Wooders, John

eBay's Buy It Now format allows a seller to list an auction with a "buy price" at which a bidder may purchase the item immediately and end the auction. When bidders are risk averse, then theoretically a buy price can raise seller revenue when values are private (but not when values are common). We report the results of laboratory experiments designed to determine whether in practice a buy price is advantageous to the seller. We find that a suitably chosen buy price yields a substantial increase in seller revenue when values are private, and a small (but statistically insignificant) increase in revenue when values are common. In both cases a buy price reduces the variance of seller revenue. A behavioral model which incorporates the winner's curse and the overweighting by bidders of their own signal explains the common value auction data better than the rational model.

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Article provided by Elsevier in its journal Games and Economic Behavior.

Volume (Year): 72 (2011)
Issue (Month): 2 (June)
Pages: 558-573

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Handle: RePEc:eee:gamebe:v:72:y:2011:i:2:p:558-573
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622836

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  1. Bikhchandani, Sushil & Riley, John G., 1991. "Equilibria in open common value auctions," Journal of Economic Theory, Elsevier, vol. 53(1), pages 101-130, February.
  2. Kagel, John H, et al, 1989. "First-Price Common Value Auctions: Bidder Behavior and the "Winner's Curse."," Economic Inquiry, Western Economic Association International, vol. 27(2), pages 241-58, April.
  3. Jacob K. Goeree & Theo Offerman, 2000. "Efficiency in Auctions with Private and Common Values: An Experimental Study," Virginia Economics Online Papers 347, University of Virginia, Department of Economics.
  4. Harstad, Ronald M., 1991. "Asymmetric bidding in second-price, common-value auctions," Economics Letters, Elsevier, vol. 35(3), pages 249-252, March.
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  6. John Wooders & Stanley S. Reynolds, 2004. "Auctions with a Buy Price," Econometric Society 2004 North American Summer Meetings 130, Econometric Society.
  7. 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, 01.
  8. Paul Milgrom & Robert J. Weber, 1981. "A Theory of Auctions and Competitive Bidding," Discussion Papers 447R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  9. Timothy Salmon & Bart Wilson, 2008. "Second chance offers versus sequential auctions: theory and behavior," Economic Theory, Springer, vol. 34(1), pages 47-67, January.
  10. Jeffrey Ely & Tanjim Hossain, 2006. "Sniping and squatting in auction markets," Natural Field Experiments 00274, The Field Experiments Website.
  11. 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.
  12. Isaac, R Mark & James, Duncan, 2000. " Just Who Are You Calling Risk Averse?," Journal of Risk and Uncertainty, Springer, vol. 20(2), pages 177-87, March.
  13. Quazi Shahriar, 2008. "Common Value Auctions with Buy Prices," Working Papers 0031, San Diego State University, Department of Economics.
  14. Christopher Avery & John H. Kagel, 1997. "Second-Price Auctions with Asymmetric Payoffs: An Experimental Investigation," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(3), pages 573-603, 09.
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