A LABORATORY STUDY OF AUCTIONS WITH A BUY PRICE

I. INTRODUCTION The rapid growth in the use of auction markets on the Internet has led to a number of innovations in auction design. One of these innovations is the development of the buy price. A buy price allows the seller, during the listing of his or her item, to indicate a price at which he or she would be willing to sell. If, during the course of the auction, the buy price is accepted by a buyer, then the usual auction procedure is halted and the item is sold to that buyer for the specified price. The buy price has been implemented by different online auction sites using various rules. On eBay, the buy price is temporary and is only available to bidders until an initial bid (or, more precisely, a bid that exceeds the reservation value) is made. Yahoo!, which currently only has auction sites active in Hong Kong, Taiwan, and Japan, uses a permanent buy price that is available throughout the auction. Amazon also featured a permanent buy price when its auction site was active. Although both Yahoo! and Amazon closed their respective auction sites in the United States, apparently unable to successfully compete with eBay for a variety of reasons, the fact that the buy price took various forms on these different sites is an interesting phenomenon. The buy price has proven to be quite popular. In a CNET News.corn article, Kane (2002) noted that 33% of eBay listings worldwide in the second quarter of 2002 featured eBay's version of a buy price (called Buy-It-Now) and that 19% of gross merchandise sales were accounted for by fixed-price sales (both Buy-It-Now prices in auctions and the eBay Stores format). Anderson et al. (2008) studied a sample of 1,177 auctions for a Palm brand personal digital assistant sold on eBay in the late summer of 2001. They found that 49.4% of auctions that ended in a sale were listed with a buy price. The use of a buy price was popular with both high and low volume sellers. Their two high volume sellers (accounting for 28.4% of the auctions) used a buy price 100% of the time. Of the remaining auctions listed by lower volume sellers, 29.4% used a buy price. The popularity of the buy price raises several interesting questions. What does a seller gain by using a buy price? For example, does it increase revenue? Under what conditions would a buyer find a buy price attractive? How do buyers respond to different buy price types and levels? What incentive is there for an auction house to allow sellers to specify a buy price? Does the use of a buy price affect bid timing or auction efficiency? And finally, our primary question, why would different auction sites use different versions of a buy price? This article is an attempt to gain some insight into these issues through the use of laboratory markets. The experiments discussed here make use of three types of auctions: auctions with no buy price, auctions with a temporary buy price that disappears once a bid is made, and auctions with a permanent buy price that is available throughout the entire auction. All three types of auctions are examined in the context of two institutions: an ascending-bid auction with proxy bidding, and an ascending-bid auction without proxy bidding. Both auction institutions are implemented with a hard close (a specific ending time for the auction). Finally, when a buy price is available in these markets, its effects are examined at three different levels. The data from these experiments lead to results in four areas: revenue, bidder utilization, bid timing, and auction efficiency. First, seller revenue is higher in auctions with buy prices than in auctions without, and revenue is higher when the buy price is permanent rather than temporary. This difference between permanent and temporary buy price revenues is most pronounced in the auctions that do not use proxy bidding. Second, auctions that utilize a permanent buy price are slightly more likely to end with the buy price being exercised than those in which the buy price is temporary, and buyers respond to lower buy price levels in the manner one would expect (with lower buy prices being exercised more frequently). …