Buy-Out Prices in Online Auctions: Multi-Unit Demand*

On many online auction sites it is now possible for a seller to augment his auction with a maximum or buy-out price. The use of this instrument has been justified in “one-shot” auctions by appeal to impatience or risk aversion. Here we offer additional justification by observing that trading on internet auctions is not of a “one-shot” nature, but that market participants expect more transactions in the future. This has important implications when bidders desire multiple objects. Specifically, it is shown that an early seller has an incentive to introduce a buy-out price, if similar products are offered later on by other sellers. The buy-out price will increase revenue in the current auction, but revenue in future auctions will decrease, as will the sum of revenues. In contrast, if a single seller owns multiple units, overall revenue will increase, if buyers anticipate the use of buy-out prices in the future by this seller. In both cases, an optimally chosen buy-out price introduces potential inefficiencies in the allocation. *We gratefully acknowledge the comments of Bent Jesper Christensen as well as seminar audiences at the University of Copenhagen, Universitat Autònoma de Barcelona, University of Toronto, the ASSET 2003 Meeting and the Canadian Economics Association Meeting (2003). **E-mail: [email protected] and [email protected]. Revised versions will be available at: www.econ.au.dk/vip htm/povergaard/pbohome/pbohome.html