The Exercise of Buy-It-Now Pricing in Auctions: Seller Revenue Implications

Buy-It-Now (BIN) auctions, or auctions that allow bidders to buy a product at a posted price, are ubiquitous in online auction markets. In this paper, we study how bidders make their decision whether to buy a product via a regular auction or via using the BIN option. We build a model of bidder’s willingness to pay (WTP) by using boundary conditions on our WTP function; this approach imposes minimal behavioral restrictions on bidder behaviors. Similarly, we construct the upper and lower bound of the seller expected revenue as a function of the BIN price based on the estimation result from the bidder WTP model. . In our empirical analysis with online notebook auction data, we find that setting a BIN price higher than the “expected” price for an item increases a bidder’s WTP, and vice versa for setting a BIN price lower. However, pure existence of BIN does not significantly affect WTP. We also find that at least 62% of sellers set their BIN prices sub-optimally from a revenue-maximization perspective. While about 15-23% of sellers set their BIN prices too high, about 39-54% of sellers set their BIN prices too low. This sub-optimality appears to stem from sellers misestimating competition among auction items. In addition to these substantive findings, we show how sellers can use our model to set optimal BIN prices. ∗ Tat Y. Chan is Assistant Professor of Marketing at the Olin School of Business, Washington University, St. Louis, MO, 63130; phone: (314) 935-6096; fax: (314) 935-6359; email: [email protected]. Vrinda Kadiyali is Associate Professor of Marketing and Economics at the Johnson Graduate School of Management, Cornell University, Ithaca, NY 14853; phone: (607) 255-1985; fax: (607) 254-4590; email: [email protected]. Young-Hoon Park is Assistant Professor of Marketing at the Johnson Graduate School of Management, Cornell University, Ithaca, NY 14853; phone: (607) 255-3217; fax: (607) 254-4590; email: [email protected]. We thank Amar Cheema, Jeroen Swinkels, Manoj Thomas and seminar participants at 2005 Marketing Science Conference for their comments.