Interplay between Buy-It-Now price and last minute bidding on online bidding strategies

Sellers and buyers on online auction sites like eBay have the option of setting and executing auction parameters such as auction length, Buy-It-Now price, starting price, reserve price, etc. Understanding why bidders choose to execute the Buy-It-Now price as opposed to submitting a bid at the last minute of an auction helps managers better choose auction parameters and generate more revenue. In this paper, we first study online bidder behavior pertaining to the execution of the Buy-It-Now option as opposed to the last minute bidding strategy on eBay. Consequently, we study the seller's decision to set a Buy-It-Now option and the amount of it. Our main finding is that a dominant strategy for the seller is to offer a Buy-It-Now option at the beginning of the auction. An early bidder arriving at the auction site is indifferent in choosing threshold Buy-It-Now prices or moving onto the auction and under particular circumstances strategically waiting for the last minutes of the auction to submit a bid. We also provide conditions on the existence of a set of equilibria which predicts the outcome of the game of executing the Buy-It-Now option versus last-minute bidding on eBay.