Common value auctions with buy prices

Abstract

Risk aversion and impatience of either the bidders or the seller have been utilized to explain the popularity of buy prices in private value auctions. This paper, using a pure common value framework, models auctions with "temporary" buy prices. We characterize equilibrium bidding strategies in a general setup and then analyze a seller's incentive to post a buy price when there are two bidders. We find that, when bidders are either risk neutral or risk averse, a risk neutral seller has no incentive to post a buy price. But when the seller is risk averse, a suitably chosen buy price can raise his expected payoff when the bidders are either risk neutral or risk averse. Since expected seller revenue is lower, bidders' expected payments are likely to be lower in a common value buy-price auction. This paper thus gives a possible explanation for the popularity of buy-price auctions with both bidders and sellers.