Academic journal article Journal of Electronic Commerce Research

Buy It Now: A Hybrid Internet Market Institution

Academic journal article Journal of Electronic Commerce Research

Buy It Now: A Hybrid Internet Market Institution

Article excerpt

ABSTRACT

This paper analyzes seller choices and outcomes in approximately 700 Internet auctions of a relatively homogeneous good. The 'Buy it Now' option allows the seller to convert the auction into a posted price market. We use a structural model to control for the conduct of the auction as well as product and seller characteristics. In explaining seller choices, we find that the 'Buy it Now' option was used more often by sellers with higher ratings and offering fewer units; and posted prices were more prevalent for used items. In explaining auction outcomes, we find that auctions with a 'Buy it Now' price had higher winning bids, ceteris paribus, whether or not the auction ended with the 'Buy it Now' offer being accepted, possibly reflecting signaling or bounded rationality. We also find that posting prices, by combining 'Buy it Now' and an equal starting price, was an effective strategy for sellers in the sample.

Keywords: market institutions, posted prices, auctions, e-commerce

1. Introduction

The Internet drastically alters absolute and relative transaction costs, and this, in turn, begins to alter market institutions. The posted offer institution dominated retail markets in the 20th century, but recently e-commerce has spurred the development of new auction institutions, as well as hybrids that combine aspects of auction and posted price institutions. As e-commerce takes hold in the retail sector-by 2006 the rapidly growing e-commerce share of retail sales reached 2.8%, or about $109 billion [US Census Bureau, 2007]-some patterns have begun to emerge. Amazon and other companies have created very efficient Internet versions of posted price institutions, and the evidence suggests that posted prices are more flexibly and finely adjusted in online settings [Smith et al., 2000]. Meanwhile, Internet auctions, led by eBay, have grown out from their original garage sale niche. As early as 2003, a substantial portion of eBay's $15 billion gross revenue1 represented retail transactions [Hof, 2003]. Auctions and posted prices seem destined to coexist online, and for overlapping sets of goods.

What are the economic factors that determine the choice of market institution?2 In this paper we present empirical evidence from recent Internet auctions on eBay that include the option for buyers to purchase immediately at a pre-specified =Buy it Now' price. As explained in detail in Section 4, the option allows sellers to offer what is effectively a hybrid of auction and posted prices, or to choose a pure version of either institution. A =Buy it Now' option may influence seller revenue in several different ways. The potential for a price premium for buyer impatience or risk aversion could account for the use of 'Buy it Now' prices if they were to raise final bids. Alternatively, transactions featuring such fixed prices may negatively impact profits due to under-pricing by naïve sellers or foregone premiums reflecting bidder excitement from auction competition.

To untangle the causes and consequences of sellers' choices, we estimate a structural model that factors in the predetermined characteristics of the seller, the good, and the transaction, while controlling for the endogenous conduct of the auction (e.g., the number of bids and bidders), to predict auction outcomes.

The remainder of the paper is organized as follows. Section 2 reviews some of the most relevant theoretical and empirical literature. Section 3 identifies variables of interest and the causal structure of the empirical model. Section 4 summarizes the data, obtained from over 700 completed eBay auctions, held during a period of five weeks, for a particular model of personal digital assistant (PDA). Section 5 presents results on seller characteristics and choices. For example, we find that the =Buy it Now' option was used more often by sellers with higher ratings (awarded by previous buyers) and offering fewer units; and posted prices were more prevalent for used items. …

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