Auctions with a Buy Price ∗

Internet auctions on eBay and Yahoo allow sellers to list their auctions with a “buy-now” option. In such auctions the seller sets a buy price at which a bidder may purchase the item immediately and end the auction. In the eBay version of a buy-now auction, the buy-now option disappears as soon as a bid is placed, while in the Yahoo version of the auction the buy-now option remains in effect throughout the auction. We characterize equilibrium bidding strategies in eBay and Yahoo buy-now auctions. We show that for both auctions, when bidders are risk averse, introducing a buy price raises seller revenue for a wide range of buy prices. In addition, when the reserve prices and the buy prices are the same in both auctions, the Yahoo format raises more revenue than the eBay format when bidders have either constant or decreasing absolute risk aversion. Bidder with decreasing absolute risk aversion prefer the eBay auction, while bidders with constant absolute risk aversion are indifferent between the two formats. JEL Code: D44 ∗Part of this work was completed while Reynolds was a visitor at Instituto de Analisys Economico in Barcelona and while Wooders was a visitor at Hong Kong University of Science and Technology. We are grateful to these institutions for their hospitality. †Department of Economics, Eller College of Management, University of Arizona, Tucson, Arizona 85721 ([email protected]). ‡Department of Economics, Eller College of Management, University of Arizona, Tucson, AZ 85721 ([email protected]).