Auctions versus posted prices with costly entry and outside options

Matthias Potarca

No 178, Working Paper Series in Economics from Karlsruhe Institute of Technology (KIT), Department of Economics and Management

Abstract: The decline of auction-format sales in favor of posted prices on digital marketplaces is commonly attributed to behavioral biases or secular changes in the market environment. This paper examines the latter by jointly modeling two forms of buyer opportunity cost within a standard symmetric independent private values framework: an entry cost sunk upon auction participation, and a mechanism-independent outside option reflecting the surplus a buyer can obtain from a close substitute at a known market price. A seller chooses between a second-price auction and a posted price; potential buyers decide whether to participate after observing their private valuations. The outside option endogenously partitions buyers into low-value types, who bid their full valuation, and high-value types, whose bids are capped at the outside option price, giving rise to qualitatively distinct entry regimes that the seller anticipates and actively shapes. Pressure from either channel strictly erodes the auction's advantage, but the seller's response to the two is asymmetric. The model yields testable implications that qualitatively align well with observed patterns and place weight on the outside option channel as a driver for the shift towards posted prices.

Keywords: auctions; posted prices; entry costs; outside options; mechanism design; e-commerce (search for similar items in EconPapers)
JEL-codes: D44 D47 D82 L81 (search for similar items in EconPapers)
Date: 2026
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