A Dynamic Model of Auctions with Buy-Out Options: Theory and Evidence

43 Pages Posted: 18 Nov 2005

See all articles by Jong-Rong Chen

Jong-Rong Chen

National Central University at Taiwan

Kong-Pin Chen

Academia Sinica - Research Center for Humanities and Social Sciences; National Taiwan University - Department of Economics

Chien-Fu Chou

National Taiwan University - Department of Economics

Date Written: November 21, 2006

Abstract

The paper considers an ascending price auction with two bidders, in which the buyers are given the additional option to obtain the object immediately by paying a fixed price (the buy-out price). We completely characterize the optimal bidding strategy of the bidder and the optimal buy-out price of the seller. We show that the more risk-averse a buyer, the earlier he is willing to buy out the object. Moreover, the seller's optimal buy-out price is decreasing in the his own degree of risk-aversion, and increasing in that of the buyer. The expected transaction price and the expected utility of the seller are higher with the buy-out option. Finally, contrary to the usual ascending price auctions, the longer it takes for an item to be sold, the lower is its transaction price. All the theoretical predictions are confirmed in the data we collect from Taiwan's Yahoo! auction site.

Keywords: auctions, on-line auctions, buy-out

JEL Classification: C73, D42, D82, L1

Suggested Citation

Chen, Jong-Rong and Chen, Kong-Pin and Chou, Chien-Fu, A Dynamic Model of Auctions with Buy-Out Options: Theory and Evidence (November 21, 2006). Available at SSRN: https://ssrn.com/abstract=946323 or http://dx.doi.org/10.2139/ssrn.946323

Jong-Rong Chen

National Central University at Taiwan ( email )

No. 300, Zhongda Road
Chung-Li Taiwan, 32054
Taiwan

Kong-Pin Chen (Contact Author)

Academia Sinica - Research Center for Humanities and Social Sciences ( email )

RCHSS
Academia Sinica
Nankang, Taipei, 11529
Taiwan
886 2 2789 8160 (Phone)
886 2 2785 4160 (Fax)

HOME PAGE: http://idv.sinica.edu.tw/kongpin/

National Taiwan University - Department of Economics

21 Hsiu Chow Rd
Taipei, 10020
Taiwan

Chien-Fu Chou

National Taiwan University - Department of Economics ( email )

21 Hsiu Chow Rd
Taipei, 10020
Taiwan

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