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The Impact of Discounting on an Auction with a Buyout Option: a Theoretical Analysis Motivated by eBay’s Buy-It-Now Feature

Abstract

An auction with a buyout option occurring over continuous time with rules similar to eBay’s “buy it now” option is analyzed. When auction participants make no distinction as to when a transaction occurs, the seller optimally chooses a buyout option price so high that bidders never exercise the option. However, time impatience on either side of the transaction can motivate the seller to offer an option price low enough so that the option is exercised with positive probability. Further, allowing a time impatient seller to offer such an option results in an ex ante Pareto improvement when bidders do not discount future transactions.

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Correspondence to Timothy Mathews.

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Mathews, T. The Impact of Discounting on an Auction with a Buyout Option: a Theoretical Analysis Motivated by eBay’s Buy-It-Now Feature. JEcon 81, 25–52 (2004). https://doi.org/10.1007/s00712-003-0006-1

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Keywords

  • auctions
  • internet
  • buyout option
  • time impatience

JEL Classification

  • D44
  • L86