Making a second price auction more attractive to a seller with risk-averse buyers: The buy-it-now option

This dissertation consists of two related chapters that study a well-observed feature on Internet auctions---the buy-it-now option. In such an option, the seller sets a buy-it-now price before the auction begins. A bidder can purchase the asset instantly at this price and there will be no follow-up auction. Alternatively, the bidder can bid for the asset, which ends the buy-it-now option and an auction ensues. The first chapter builds a theoretical model and shows that the buy-it-now option can make a seller strictly better off, thus rationalizing the wide adoption of this option in Internet auctions. This finding also sheds light on the selling mechanism design with the restriction of "losers do not pay" when buyers are risk averse. The second chapter provides empirical evidences from eBay that the buy-it-now option can make sellers strictly better off.; The first chapter introduces the buy-it-now option to a private value second price auction (SPA) with constant absolute risk averse buyers. This chapter analyzes the effect of the buy-it-now option from both the seller's and buyers' perspectives. By taking the buy-it-now option, the buyer removes two kinds of risks: (1) winning or losing, (2) random payment if winning, since he will acquire the item with certainty at the buy-it-now price set by the seller. A risk-averse buyer is willing to pay a premium to buy "insurance", which is the source of the increment in the seller's expected payoff. Compared with a standard SPA, the ex ante expected utility increases for the buyer who has the buy-it-now option, but decreases for other buyers.; The optimal auction design with risk-averse buyers requires payment transfers between a seller and losing bidders. This requirement is unattractive when such payment transfers are costly or infeasible. This chapter shows one way to improve the performance of auctions with the restriction "losers do not pay" is to use a buy-it-now option, which has been employed by Internet auction sites.; The second chapter provides empirical evidence on the effectiveness of the buy-it-now option. Data collected from eBay are examined with the censored normal maximum likelihood estimation procedure. Evidence shows a positive correlation between the sale price and the use of the buy-it-now option. Results from a probit estimation confirm that the execution of the buy-it-now option has a positive relationship with the buy-it-now price, but negative relationships with the number of listing days and the shipping & handling fee.