On-Line Auctions with Buy-It-Now Pricing: A Practical Design Model and Experimental Evaluation

Roumen Vragov, Richard Di Shang, and Karl R. Lang
International Journal of Electronic Commerce,
Volume 14 Number 4, Summer 2010, pp. 39.

Abstract: Several studies have shown that on-line consumer-to-consumer (C2C) auctions operate below their revenue and efficiency potential. From a theoretical perspective, dynamic prices should improve auction performance, but it is unclear whether this is so in practice. Experiments with economically motivated human subjects tested the benefits of using dynamic prices in on-line auctions. The subjects, as buyers or sellers in a simulated auction environment, electronically traded five virtual products and at the end of each session received cash payments based on the experimental profits they generated. The results demonstrate that a dynamic auction design using a dynamic buy-it-now pricing option increases seller surplus as well as overall operational efficiency. Contrary to previous literature, the study shows that some dynamic pricing mechanisms are relatively easy to implement and have the potential to improve current static pricing auctions. Future theoretical models of dynamic auctions should abandon assumptions that unnecessarily restrict the ways dynamic pricing can be implemented.

Key Words and Phrases: Auction design, auction performance, buyout price, dynamic auctions, dynamic pricing, experimental economics, on-line auctions.