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

Firms are increasingly adopting auctions as an additional channel to sell their products. Two pricing formats, fixed price and auctions, have been used and studied separately. Recently they have been brought together in a new pricing format that offers bidders the option of prematurely ending the auction at a fixed price. For example, eBay calls this a “Buy-it-Now ” auction. The growing popularity of auctions presents an interesting pricing decision for managers: whether to use a regular auction or a Buy-it-Now auction to market products. 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 also explicitly imposes a maximum bidding level that could limit potential revenue. This paper answers the following research questions: why are these two pricing formats used jointly, will they increase the seller’s profit, how is an optimal buy-it-now price determined, and how the optimal buy-it-now price is influenced by the key factors such as the customer’s hassle cost, the seller’s reserve price, and the number of potential customers. Our results show that due to the customer’s hassle cost, the Buy-it-Now price can be used as a marketing tool by the seller to increase both customers ’ utility and the seller’s profit. Additionally, we empirically test the predictions of the theoretical model by using real-time data from eBay.