Recent graduate Nicholas Shunda (IDEAS), advised by Vicki Knoblauch (IDEAS), will publish the paper “Auctions with a Buy Price: The Case of Reference-Dependent Preferences” in the journal Games and Economic Behavior. The paper contributes to a theoretical literature on rationales for the hybrid selling mechanism known as an auction with a buy price. In an auction with a buy price, a seller provides bidders with an option to forgo the auction and transact at a fixed price. The most well-known example of an auction with a buy price is eBay’s “Buy-It-Now” feature. The paper demonstrates that sellers can enhance revenues by adding a buy price to their auctions if bidders evaluate auction and purchase outcomes on the bases of surplus and comparison to a reference point depending upon the auction’s reserve and buy price. In contrast to alternative explanations for auctions with buy prices, such as risk aversion and impatience, which predict bidding behavior that is independent of the auction’s parameters, bidders with reference-dependent preferences submit bids that vary directly with the existence and size of the auction’s reserve and buy prices, behavior extensively documented in laboratory and field experimental auctions.

About these ads