Price formation in a sequential selling mechanism

This paper studies a dynamic trade institution, where an auction is combined with a “Buy-It-Now” option. This option presents a take-it-or-leave-it price offered by the seller to a potential buyer before the auction. If the buyer rejects this buyout price, the object is auctioned off. In equilibrium, sales should take place only in the auction. An experimental test reveals that average buyout prices and profits are well captured by the theoretical prediction. However, a substantial amount of sales takes place before the auction. This is caused by offering (too) low or accepting (too) high buyout prices. We discuss alternative explanations such as risk preferences and (wrong) formation of beliefs that might account for agents’ behavior.