Auction Versus Posted Price Mechanisms in Online Sales: The Roles of Impatience and Dissuasion

Abstract

If all potential buyers participate in a first-price auction, then (theoretically) the auction price weakly exceeds the price placed by the seller under a posted price mechanism. However, it is documented that in online sales sellers prefer posted price mechanism to auction. We aim to explain this empirical contradiction in terms of partial participation of the buyers in auction, prompted by impatience and dissuasion. Auction on Internet often requires waiting, and hence, many impatient participants may not join the auction process. Furthermore, a previous experience of failure in auction may also prompt buyers’ non-participation. We show, theoretically, that in the case of partial participation, the price in auction may be lower; posted price turns out to be payoff dominant for both the buyers and the sellers. We then run a laboratory experiment and verify the presence of impatience (through waiting cost) and dissuasion factor (through previous failure) among the subjects.