When Auction Meets Fixed Price: A Theoretical and Empirical Examination of Buy-it-Now Auctions

Recently fixed pricing and auctions have been brought together in a new pricing format that offers bidders the option of prematurely ending an auction at a fixed price. eBay calls this a “Buy-it- Now” auction, uBid calls this “UBuy it” and Yahoo auctions refer to this as a “Buy Now”. The growing popularity of auctions presents an interesting pricing decision for managers: whether to sell at a fixed price, sell in a regular auction, or to sell through a buy-it-now auction. By posting a fixed-price at an auction, the seller provides customers a convenient option to buy the item directly without bidding. However, in doing so, the seller implicitly imposes a maximum bidding level that could potentially limit revenue. This paper studies this new pricing format and answers the following research questions: why is fixed price used at traditional auctions, will buy-it-now increase the seller’s profit, how is an optimal price determined, and how is the buy-it-now decision influenced by key factors such as the customer’s cost of participating in the auction, the seller’s reserve price, and the number of potential customers. Our results show that buy-it-now auctions can increase both customers’ utility and sellers’ profit under certain conditions. We empirically test the predictions of our theoretical model using data collected from eBay.