Two-Stage Buy-It-Now Auctions
Yu Yvette Zhang
Texas A&M University
Texas A&M University - Department of Economics
March 23, 2011
This paper studies second-price auctions with a temporary Buy-It-Now price (BIN auctions) using a two-stage model, in which two groups of bidders enter the auction at different times. The early bidders are offered a Buy-It-Now (BIN) option to purchase the item immediately at a listed price (BIN price). If no early bidder accepts the BIN option, an additional group of bidders (late bidders) enter the auction and both groups of bidders participate in a second-price sealed-bid auction without BIN option. When bidders are risk averse with concave utility functions, we establish the existence and uniqueness of a cutoff equilibrium such that an early bidder will accept the BIN option if his valuation is higher than the cutoff valuation. Moreover, bidders are more likely to accept the BIN option when fewer bidders are offered the BIN option. We show that when facing risk averse bidders, the seller can obtain higher expected revenue in BIN auctions than in standard second-price auctions. Furthermore, the expected seller revenue decreases with the number of early bidders. Consequently, the expected seller revenue is higher in the auctions with BIN only available to a subset of bidders than in the auctions with BIN available to all bidders. These results may help explain the popularity of temporary BIN auctions on eBay and the observed high acceptance frequencies of BIN prices in experimental and field studies.
Number of Pages in PDF File: 27
Keywords: Buy-It-Now Auctions, Two-Stage Model, eBay, Risk Aversion, Concave Utility Function
JEL Classification: D44, L10working papers series
Date posted: March 28, 2011
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