Abstract-Increasingly used in online auctions, buyout prices allow bidders to instantly purchase an item listed. We distinguish between two types of buyout options: a temporary option that disappears if a bid above the reserve price is made and a permanent option that stays throughout the auction or until it is exercised. In order to develop a methodology for finding temporary and permanent buyout prices that maximize the seller's discounted revenue, and to examine the relative benefit of using each type of option in various environments, we formulate a model featuring time-sensitive bidders with uniform valuations and Poisson arrivals (but endogenous bidding times). We characterize equilibrium bidder strategies in both cases and then solve the problem of maximizing seller's utility by simulation. Our numerical experiments suggest that a seller can increase his revenue significantly by introducing a buyout option. Additionally, while a temporary buyout option promotes early bidding, a permanent option gives an incentive to the bidders to bid late, thus leading to concentrated bids near the end of the auction.

Abstract-Increasingly used in online auctions, buyout prices allow bidders to instantly purchase an item listed. We distinguish between two types of buyout options: a temporary option that disappears if a bid above the reserve price is made and a permanent option that stays throughout the auction or until it is exercised. In order to develop a methodology for finding temporary and permanent buyout prices that maximize the seller's discounted revenue, and to examine the relative benefit of using each type of option in various environments, we formulate a model featuring time-sensitive bidders with uniform valuations and Poisson arrivals (but endogenous bidding times). We characterize equilibrium bidder strategies in both cases and then solve the problem of maximizing seller's utility by simulation. Our numerical experiments suggest that a seller can increase his revenue significantly by introducing a buyout option. Additionally, while a temporary buyout option promotes early bidding, a permanent option gives an incentive to the bidders to bid late, thus leading to concentrated bids near the end of the auction.

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