Auctions with a buy price: The case of reference-dependent preferences

Abstract

In an auction with a buy price, the seller provides bidders with an option to end the auction early by accepting a transaction at a posted price. The "BuyIt-Now" option on eBay is a leading example of an auction with a buy price. This paper develops a model of an auction with a buy price in which bidders use the auction's reserve price and buy price to formulate a reference price. The model both explains why a revenue-maximizing seller would want to augment her auction with a buy price and demonstrates that the seller sets a higher reserve price when she can affect the bidders' reference price through the auction's reserve price and buy price than when she can affect the bidders' reference price through the auction's reserve price only. Introducing a small reference-price effect can shrink the range of buy prices bidders are willing to exercise. The comparative statics properties of bidding behavior are in sharp contrast to equilibrium behavior in other models where the existence and size of the auction's buy price have no effect on bidding behavior. Journal of Economic Literature Classification: D44, D82, L86

Behavioral Contract Theory

“…When either the number of bidders or the exogenous component of the reference point is high, the bid-raising benefit of increasing the reserve price dwarfs the cost from the increased risk of not being able to sell, and therefore even a small degree of loss aversion can lead to a significant increase in the optimal reserve price. Shunda (2009) assumes that bidders' reference points depend on the seller's reserve price as well as his "buy price"-a price at which a bidder may purchase the good from the seller before the auction starts. Increasing the buy price raises the bidders' willingness to pay, and hence leads to a larger pool of participants and higher bids in the auction stage, but lowers the probability that a bidder buys the item in the first stage.…”

Multi-dimensional reference-dependent preferences in sealed-bid auctions – How (most) laboratory experiments differ from the field

“…equilibrium concept) as well as on specific preferences structures (e.g., risk-neutrality). 1 Since Smith (1965), experimental economists therefore attempt to gain more insights into bidding behavior by inducing (monetary) values for the auction item (for a summary, see Kagel, 1995).…”

Reserve price and competing bids: Reference points for product evaluations in online auctions?

“…We restrict our attention to cues relating to the reserve price of the seller, denoted by r , and the highest competing bid, denoted by c . Alternative prices such as buy‐it‐now prices or posted prices on other non‐auction platforms could obviously be included in the framework (Ariely and Simonson ; Highfill and O'Brian ; Shunda ). We assume that either one or both of these values can become a reference point in the construction of the consumer's product evaluation and define the following model: …”