Temporary and Permanent Buyout Prices in Online Auctions

  • Authors:

  • Jérémie Gallien;Shobhit Gupta

  • Affiliations:

  • Sloan School of Management, Massachusetts Institute of Technology, 50 Memorial Drive, Cambridge, Massachusetts 02142;Operations Research Center, Massachusetts Institute of Technology, 77 Massachusetts Avenue, Cambridge, Massachusetts 02139

  • Venue:
  • Management Science
  • Year:
  • 2007

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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, whereas 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 participant is 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, whereas 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.