A Dynamic Model of Auctions with Buy-Out Options : Theory and Evidence

The paper considers an ascending price auction with two bidders, in which the buyers are given the additional option to obtain the object immediately by paying a fixed price (the buy-out price). We completely characterize the optimal bidding strategy of the bidder and the optimal buy-out price of the seller. We show that the more risk-averse a buyer, the earlier he is willing to buy out the object. Moreover, the seller's optimal buy-out price is decreasing in the his own degree of risk-aversion, and increasing in that of the buyer. The expected transaction price and the expected utility of the seller are higher with the buy-out option. Finally, contrary to the usual ascending price auctions, the longer it takes for an item to be sold, the lower is its transaction price. All the theoretical predictions are confirmed in the data we collect from Taiwan's Yahoo! auction site