Buyout Option and Reserve Price in Online Auctions: Should I Bid or Buy Out?

This article examines the influences of two forms of buyout options – permanent (i.e., a buyer could buy out the item at any point during the entire bidding process) and temporary (i.e., buyout option ceases to be present once the bidding price exceeds the reserve price) – under the presence of reserve price on a buyer’s decision in online auctions. We propose that the presence of permanent buyout option leads a buyer to buy out instead of bidding. However, a buyer with temporary buyout option would attempt to bid above the reserve price so as to prevent other buyers from ending the auction prematurely. A series of controlled experiments was subsequently conducted to investigate the impact of buyout permanence (permanent versus temporary), price contrast (small versus large difference between the average clearance price and buyout price) and reserve price (low versus high) on a buyer’s behavior. The results support our conjecture by suggesting that a buyer is more likely to be loss averse and has a higher propensity to buy out in the presence of the permanent buyout option. However, when facing the temporary buyout option, a buyer becomes reserve-price conscious and is more likely to bid.