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Optimal sale across venues and auctions with a buy-now option

Bose, S. and Daripa, Arup (2009) Optimal sale across venues and auctions with a buy-now option. Economic Theory 38 (1), pp. 137-168. ISSN 0938-2259.

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Official URL: http://dx.doi.org/10.1007/s00199-008-0345-9

Abstract

We characterize the optimal selling mechanism for a seller who faces demand demarcated by a high and a low end and who can access an (online) auction site (by paying an access cost) in addition to using his own store that can be used as a posted price selling venue. We first solve for the optimal mechanism of a direct revelation game in which there is no venue-restriction constraint. We find that the direct optimal mechanism must necessarily incorporate a certain kind of pooling. We then show that even with the venue constraint, the seller can use a two stage indirect mechanism that implements the allocation rule from the optimal direct mechanism, and uses the venues in an optimal fashion. The first stage of the indirect mechanism is a posted price at the store. If the object is not sold, we move to stage two, which involves an auction at the auction site. A feature of this auction is a buy-now option which is essential for implementing the pooling feature of the optimal direct mechanism. We also show that the buy-now option in the optimal mechanism is of a “temporary” variety, and that a “permanent” buy-now option, in contrast, cannot implement the optimal mechanism. Auctions with a temporary buy-now option are in widespread use on eBay.

Item Type: Article
Keyword(s) / Subject(s): Optimal auction, eBay auctions, temporary buy-now option, Permanent buy-now option, heterogeneous sales venues, posted price, price discrimination
School or Research Centre: Birkbeck Schools and Research Centres > School of Business, Economics & Informatics > Economics, Mathematics and Statistics
Depositing User: Administrator
Date Deposited: 09 Dec 2010 10:04
Last Modified: 17 Apr 2013 12:33
URI: http://eprints.bbk.ac.uk/id/eprint/1933

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