The scenario of business sellers utilizing online auction markets to reach consumers and sell new products is becoming increasingly commonplace. We propose a class of risk management tools, loosely based on the concept of financial options, that can be employed by such sellers. We examine market conditions, and risk and option pricing scenarios where writing options is beneficial to sellers, and purchasing options is beneficial to buyers. We provide a framework to analyze the value proposition of options to potential buyers, option holder behavior implications on auction processes, and seller strategies to write and price options that maximize potential revenues. Preliminary results based on actual auction data suggest that options can provide significant benefits under certain conditions.
Gopal, Ram; Thompson, Steven; Tung, Y. Alex; and Whinston, Andrew, "Transaction Risk Management in Online Auctions" (2003). ICIS 2003 Proceedings. 94.