Posted price selling and online auctions

In an auction-style listing at eBay, sellers have the option to set a posted price (also known as buy-it-now price), which allows buyers to instantly purchase an item before the start of the auction. This paper provides a rationale for such a selling mechanism. When many identical items are offered for sale and there are many buyers, random matching between auctions and the bidders can cause allocative inefficiency. We show that, with the buy-it-now option, some high valuation buyers buy the item before the start of the auction. In the case of a single seller with many items for sale, this not only reduces the allocative inefficiency, but also increases the seller's expected revenue. In the case of many competing sellers, if sellers choose between the strategies of (i) auction only or (ii) auction with buy-it-now option, the option of buy-it-now will be used with positive probability in any equilibrium.