Abstract
Abstract To sell a good before a deadline, a monopolist chooses between posting a price and running a costly reserve-price auction each period. Buyers with independent private values arrive over time. For a wide range of auction costs, the profit-maximizing mechanism sequence is to post prices first and then to run auctions. The optimality of the prices-then-auctions mechanism sequence provides a new justification for the hybrid sales mechanism of allowing the “Buy It Now” option before a standard auction on eBay.
Highlights
This paper takes into account auction costs for both sellers and buyers, and investigates how a seller repeatedly chooses between prices and auctions to maximize her expected profit in a dynamic environment
The seller in the static setting when all buyers arrive at once runs an auction with the Myerson optimal reserve price if the auction cost is low and posts a price if the auction cost is high; in the dynamic setting, a sequence of auctions with declining reserve prices is optimal when the auction cost is sufficiently low, and a sequence of declining prices is optimal when the auction cost is sufficiently high
When the auction cost is within the most economically relevant range, the optimal mechanism sequence takes a neat form: prices followed by auctions
Summary
The seller in the static setting when all buyers arrive at once runs an auction with the Myerson optimal reserve price if the auction cost is low and posts a price if the auction cost is high; in the dynamic setting, a sequence of auctions with declining reserve prices is optimal when the auction cost is sufficiently low, and a sequence of declining prices is optimal when the auction cost is sufficiently high. In theory a second-price auction with a carefully chosen reserve price generates the optimal revenue when buyers have independent private values, in practice it could be costly to run such an auction. This paper takes into account auction costs for both sellers and buyers, and investigates how a seller repeatedly chooses between prices and auctions to maximize her expected profit in a dynamic environment.
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