The Role of the Buyout Price in the Internet Auction

Abstract

We consider an Internet auction with the “buyout price” as an optional feature. Under IID assumption and risk-neutral buyers, we show that the expected revenue to the seller from the Internet auction with the buyout price is larger than the expected revenue from the Internet auction without the buyout price. Moreover, given the uniform distribution for reservation values, the revenue gain of employing the buyout price option is getting smaller as the number of potential buyers becomes larger.