Analysis on buy-it-now price and performance in internet auction

Abstract

Recently electronic auction offers the option to buy at the posted price, called a buy-it-now price. Internet auctions with buy-it-now prices offer consumers two alternatives of purchasing. In this paper, we compare two purchasing mechanisms in the internet auctions and reveal how the two mechanisms interact with each other through consumer’s search for price-related information. We investigate to find the determinants of choice of market mechanisms. We present an empirical model based on the search cost theory to illustrate the relationships between two mechanisms. We empirically test the hypotheses drawn from the model and present the results. While on average the winning bids without buy-it-now prices are lower than those with buy-it-now prices, a more detailed investigation reveals it to be not always the case. In fact, with differentially informed consumers, ones with higher search costs often buy the same products from the auctions at prices higher than buy-it-now price. Depending on the maturity of the product, the consumers pay higher premiums. We show a clear evidence of increase in consumer search activity resulting in lower premiums in winning bid without buy-it-now price than buy-it-now price for expensive items. The empirical analyses not only prove the existence of friction in the internet auctions but also investigates the relative importance of its various determinants. We also show comparison of the performances of buy-it-now price mechanisms. Buy-it-now price mechanisms of eBay and auction.co.kr are different. We embody each buy-it-now price mechanism by agent-based simulation modeling. Our simulation results assert that buy-it-now price mechanism of eBay is preferred to bidders.