Auctions with a buy price: The case of reference-dependent preferences

In an auction with a buy price, the seller provides bidders with an option to end the auction early by accepting a transaction at a posted price. This paper develops a model of an auction with a buy price in which bidders use the auction's reserve price and buy price to formulate a reference price. The model both explains why a revenue-maximizing seller would want to augment her auction with a buy price and demonstrates that the seller sets a higher reserve price when she can affect the bidders' reference price through the auction's reserve price and buy price than when she can affect the bidders' reference price through the auction's reserve price only. The comparative statics properties of bidding behavior are in sharp contrast to equilibrium behavior in other models where the existence and size of the auction's buy price have no effect on bidding behavior.