Studies & Opinions
The Leasing Option Premium
Alex
Tajirian
February 17, 2006
The option-to-buy component
of a lease may be worth more than what an option pricing formula
predicts. A recent study by Wolf et al. finds new evidence of an
“endowment effect” in which the possession of an item increases
the value a person places on it. They find that the longer people
examined the item, the more they were prepared to pay for it.
In the standard demonstration
of the endowment effect, a person’s value for an item increases
once he or she owns it. One explanation of this effect is that ownership
causes increased attachment to the item, which, in turn increases
its subjective value.
Applying this principal to
domain name leases suggests that there is an additional incentive
for owners to lease their domain names. Moreover, this incentive
underscores the imperative of including flexibility options in the
domain name pricing model, as noted by Tajirian (2005).
Reference:
-
James R. Wolf, Hal R. Arkes, and Waleed
A. Muhanna (2005), "Is Overbidding in Online Auctions the
Result of a Pseudo-Endowment Effect?". Available online
at <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=735464>.
-
Alex Tajirian (2005), “Valuing
Domain Names: Methodology,” DomainMart.
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