Auctions with a Buy Price

Abstract

Internet auctions on eBay and Yahoo allow sellers to list their auctions with a buy-now option. In such auctions the seller sets a buy price at which a bidder may purchase the item immediately and end the auction. In the eBay version of a buy-now auction, the buy-now option disappears as soon as a bid is placed, while in the Yahoo version of the auction the buy-now option remains in effect throughout the auction. We characterize equilibrium bidding strategies in eBay and Yahoo buy-now auctions. We show that for both auctions, when bidders are risk averse, introducing a buy price raises seller revenue for a wide range of buy prices. In addition, when the reserve prices and the buy prices are the same in both auctions, the Yahoo format raises more revenue than the eBay format, while the auctions are utility equivalent from the bidders' perspective.