Implications of Expected Changes in the Seller’s Threshold Price in Name-Your-Own-Price Auctions

0

Author Information : Scott Fay (Whitman School of Management, Syracuse University)
Juliano Laran (School of Business, University of Miami)

Year of Publication : Management Science (2009)

Summary of Findings : When a bidder suspects the threshold price sometimes changes, but not often, they may decide to decrease their bid instead of increasing it steadily, which is a more normal response, and bidders’ expectations about price changes increases their satisfaction with the online auction process.

Research Questions : How do consumers’ perceptions about price fluctuations affect their bidding patterns?

What we know : The Internet allows companies to interact with customers in ways that may have been prohibitively costly using traditional channels. In particular, the Internet has facilitated the emergence of name-your- own-price (NYOP) auctions. This is the first paper to explore how different expectations about price changes will impact bidding patterns. For instance, when would it be optimal for consumers to bet on the chance that a company will lower the price of a product and thus place a lower bid than a previously placed bid.

Novel Findings : When a bidder suspects the threshold price sometimes changes, but not often, they may decide to decrease their bid instead of increasing it steadily, which is a more normal response.

Bidders’ expectations about price changes increases their satisfaction with the online auction process.

Consumers are very strategic in how they bid; drop bidding is part of an optimal bidding strategy for fully rational customers.

Impatient bidders are more likely to decrease their bids at some point in the bid sequence than patient bidders

Implications for Practice : We find that expectations of changes in a seller’s threshold price lead to more drop bids and an unwillingness of consumers to increase their bid levels continuously. Therefore, a firm may benefit from lowering consumers’ expectations that the price may change in order to discourage drop bids.

An NYOP seller may attract and retain more customers if it introduces variability in its threshold price.

Implications on Research: This is the first paper to explore how different expectations about price changes will impact bidding patterns.

Full Citations : Scott Fay and Juliano Laran 2009. “Implications of Expected Changes in the Seller’s Threshold Price in Name-Your-Own-Price Auctions.” Management Science 55.11 (November): 1783-1796.

http://pubsonline.informs.org/doi/abs/10.1287/mnsc.1090.1064

Abstract : The seller's threshold price in name-your-own-price auctions varies over time. However, consumers must bid without knowing when these variations occur because the threshold price is unobservable to them. This paper uses an analytical model and laboratory auctions to explore how the frequency of changes in the threshold price impacts consumer bidding behavior in name-your-own-price auctions. In particular, we consider how the frequency of these expected changes affects the optimal pattern of bid sequences (e.g., strictly increasing over time or following a nonmonotonic pattern). We find that when the probability of a price change is moderate, consumers may have an incentive to use nonmonotonic bidding patterns. Rather than steadily increasing their bids over time, consumers will, at some point in the bid sequence, decrease their bid. However, when the expected probability of a price change is very low or very high, consumers do not have an incentive to use nonmonotonic bidding patterns. Interestingly, impatient bidders are more likely to decrease their bids at some point in the bid sequence than patient bidders. Finally, we find that more frequent price changes may increase customer satisfaction.

Click here to access Full Paper

When a bidder suspects the threshold price sometimes changes, but not often, they may decide to decrease their bid instead of increasing it steadily, which is a more normal response, and bidders’ expectations about price changes increases their satisfaction with the online auction process.

Scott Fay

Scott Fay

Professor Fay is an associate professor of marketing and director of the integrated core. He is particularly interested in examining how firms can harness the power of new technologies. Other topics Professor Fay pursues include the personalization process, marketing in social media and reverse auctions.
Scott Fay
Share.

Comments are closed.