Temporary and Permanent Buyout Prices in Online Auctions

35 Pages Posted: 14 Jun 2006

See all articles by Shobhit Gupta

Shobhit Gupta

Massachusetts Institute of Technology (MIT) - Operations Research Center

Jérémie Gallien

London Business School

Date Written: June 2006

Abstract

Buyout options allow bidders to instantly purchase at a specified price an item listed for sale through an online auction. A temporary buyout option disappears once a regular bid is submitted, while a permanent option remains available until it is exercised or the auction ends; such buyout price may be static and remain constant throughout the auction, or dynamic and vary as the auction progresses. We formulate a game-theoretic model featuring time-sensitive bidders with independent private values and Poisson arrivals but endogenous bidding times to answer the following questions: How should a seller set the buyout price (if at all)? What are the implications of using a temporary buyout option relative to a permanent one? What is the potential benefit associated with using a dynamic buyout price? For all buyout option types we exhibit a Nash equilibrium in bidder strategies, argue that this equilibrium constitutes a plausible outcome prediction, and study the problem of maximizing the corresponding seller revenue. Our numerical experiments suggest that when any of the participants are time-sensitive, the seller may significantly increase his utility by introducing a buyout option, but that dynamic buyout prices may not provide a substantial advantage over static ones. Furthermore, while permanent buyout options yield higher predicted revenue than temporary options, they also provide additional incentives for late bidding and may therefore not be always more desirable.

Keywords: buyout option, online auction, Nash equilibrium

Suggested Citation

Gupta, Shobhit and Gallien, Jérémie, Temporary and Permanent Buyout Prices in Online Auctions (June 2006). MIT Sloan Research Paper No. 4608-06. Available at SSRN: https://ssrn.com/abstract=908672 or http://dx.doi.org/10.2139/ssrn.908672

Shobhit Gupta

Massachusetts Institute of Technology (MIT) - Operations Research Center ( email )

77 Massachusetts Avenue
Bldg. E 40-149
Cambridge, MA 02139
United States

Jérémie Gallien (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

HOME PAGE: http://faculty.london.edu/jgallien/

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