Private‐Value Auction Versus Posted‐Price Selling: An Agent‐Based Model Approach

• Published date: 01 October 2015
• Date: 01 October 2015
• DOI: http://doi.org/10.1002/isaf.1381

PRIVATE-VALUE AUCTION VERSUS POSTED-PRICE SELLING:

AN AGENT-BASED MODEL APPROACH

CHRISTOPHER N. BOYER,

a

B. WADE BRORSEN

b

*AND JAMES R. FAIN

c

a

Department of Agricultural and Resource Economics, University of Tennessee, Knoxville, TN, USA

b

Department of Agricultural Economics, Oklahoma State University, Stillwater, OK, USA

c

Department of Economics and Legal Studies in Business, Oklahoma State University,Stillwater, OK, USA

SUMMARY

An agent-based first-price private-value auction and an agent-based posted-price market are developed to compare

these selling methods when buyers have privatevalues. If the seller cannot impose a reserve price and has little un-

certainty about the item’s value, the seller’s expected revenue is highest in the posted-price market. Otherwise, the

seller is better off selling the item with the auction. Using a genetic algorithm and Monte Carlo integration solved

the agent-based models quicker and provided more precise answers than solving models with particle swarm op-

timization and using the trapezoidal rule for numerical integration. Copyright © 2015 John Wiley & Sons, Ltd.

1. INTRODUCTION

The development of online markets allows sellers to choose among alternative selling methods. For in-

stance, individuals can choose an online auction market with or without a reserve price, such as eBay,

or can choose an online posted-price market, such as Craigslist. Previous theoretical and experimental

research (Wang, 1993; Kultti, 1999; Campbell & Levin, 2006) has investigated this choice, but has fo-

cused more on the distribution of buyers’valuations of the item being sold.

Wang (1993) developed a theoretical model to compare a seller’s revenue from selling an item with a

posted price to selling the same item using an auction with a reserve price (lowest acceptable bid price)

when the buyers have independent private values. When buyers’independent private values are widely

dispersed, the auction is the optimal selling method, but when buyers’independent private values be-

come less dispersed the posted-price market is the optimal selling method (Wang, 1993). Wang

(1998) extended his theoretical model to allow buyers’private values to be correlated and found similar

results to Wang (1993). Campbell and Levin (2006) compared sellers’revenue from selling an item

with an auction and with a posted price when the buyers’values for the item are affiliated. Their the-

oretical model demonstrates that a seller is not always better off selling an item with an auction when

buyers’values for the item are affiliated.

Kultti (1999) compared sellers’utility from selling in a posted-price market with selling in an auction

when the buyers have a common value. Kultti (1999) used a model that compared the probability of

buyers and sellers meeting in each market and used evolutionary game dynamics to solve the model.

Kultti (1999) found that the probability of buyers and sellers meeting in an auction and posted-price

market are equivalent; therefore, the seller’s expected utility in the posted-price market and the auction

are always equivalent.

* Correspondence to: B. Wade Brorsen, Department of Agricultural Economics, Oklahoma State University, Stillwater, OK,

USA. E-mail: wade.brorsen@okstate.edu

Copyright © 2015 John Wiley & Sons, Ltd.

INTELLIGENT SYSTEMS IN ACCOUNTING, FINANCE AND MANAGEMENT

Intell. Sys. Acc. Fin. Mgmt. 22, 249–262 (2015)

Published online 11 November 2015 in Wiley OnlineLibrary (wileyonlinelibrary.com) DOI: 10.1002/isaf.1381