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Revenue in first-price auctions with a buy-out price and risk-averse bidders

Author

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  • William E. Gryc

    (Muhlenberg College)

Abstract

We model the “Buy-It-Now or Best Offer” eBay listing option as a first-price auction with a buy-out price and consider seller revenue when bidders are risk-averse. In this model we consider a discrete setting and a continuous setting. We show that a buy-out price in a first-price auction can increase seller revenue in the discrete setting but not in the continuous setting. Furthermore, we prove that in either setting a second-price auction with an optimally chosen buy-out price will never generate more expected revenue than a first-price auction with an optimally chosen buy-out price. These theoretical results support the thesis that a first-price mechanism is superior in expected revenue generation to a second-price mechanism in an online marketplaces where sellers are risk-neutral and buyers are risk-averse and explain the prevalence of “Buy-It-Now or Best Offer” listings on eBay over the traditional eBay auction.

Suggested Citation

  • William E. Gryc, 2020. "Revenue in first-price auctions with a buy-out price and risk-averse bidders," Journal of Economics, Springer, vol. 129(2), pages 103-142, March.
    • Handle: RePEc:kap:jeczfn:v:129:y:2020:i:2:d:10.1007_s00712-019-00674-8
    DOI: 10.1007/s00712-019-00674-8
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    References listed on IDEAS

    as
    1. Timothy Mathews, 2006. "Bidder Welfare In An Auction With A Buyout Option," International Game Theory Review (IGTR), World Scientific Publishing Co. Pte. Ltd., vol. 8(04), pages 595-612.
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    7. Menezes, Flavio M., 2008. "An Introduction to Auction Theory," OUP Catalogue, Oxford University Press, number 9780199275991.
    8. Timothy Mathews & Brett Katzman, 2006. "The role of varying risk attitudes in an auction with a buyout option," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 27(3), pages 597-613, April.
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    Cited by:

    1. Shuang Xu & Yong Zhao & Yeming Gong, 2021. "Equivalence and revenue comparison among identical-item auctions," Journal of Economics, Springer, vol. 134(3), pages 261-292, December.

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    More about this item

    Keywords

    Auction; Best offer; Buy-out; eBay; Risk aversion;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software

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