Since online auctions are more and more used in e-commerce activities, interactive pricing mechanism becomes a popular trend on the Internet (Bichler 2000), in which both sellers and buyers engage in exchanging bids to interactively determine the price level (Voigt and Hinz 2014). From the view of sellers, they could increase prices without losing customers by differentiating prices based on buyers’ willingness to pay, and therefore make more profits. For buyers, they can decide whether or not close the deal according to their willingness to pay, with the aim of maximizing their savings.

Voigt and Hinz investigate strategic behavior in an NYOP market and impacts on surplus distribution by a laboratory experiment with 100 participants. Due to learning effect, sellers reduce their reservation price (also known as the “price threshold”) over time, while buyers decrease their bid levels compared to their willingness to pay. Aiming to finalize more transactions and increase surplus (buyers’ bids minus seller’s costs), sellers would place reservation price closer to product cots. Buyers would learn that the reservation price approaches seller costs over time, and thus they believe they can close a deal at a lower price.

Moreover, buyers bid based on their assumptions of the sellers’ costs, and therefore, sellers don’t need to know buyers’ willingness to pay in order to predict their bids. Furthermore, emotions strongly affect buyers’ next bidding behaviors. If they failed to realize a deal in the previous bid, they are more likely to sharply raise their next bid; if succeed, they are likely to slightly reduce their next bid. Also, buyers show a preference to increase the chance of obtaining the products rather than increase the surplus. One thing worth mentioning is that the sellers always realize the larger share of the total surplus of sellers and buyers.

Given the evidences provided by this study, it seems that selling products via NYOP is a win-win idea. It would give more confidence for sellers to enter NYOP marketplaces. How to place reservation prices affects the surplus distribution (or benefit distribution) to some extent, and hereby is the key to make NYOP a sustainable pricing mechanism. Sellers on NYOP platforms should place adaptive reservation prices according to the information about buyers’ bidding behavior, in order to decrease the buyers’ chances of predicting the reservation price over time.

Consumers enjoy having the possibility of deciding how much they are willing to pay for whatever they want, and believe they can save money in NYOP auctions. So far, however, NYOP is mainly used in tourism and airline industry (such as Priceline and Expedia), and why not use it in other industries such as restaurants and fashion retailers? Restaurants usually use posted price and most fashion retailers offer discounts at the end of seasons in order to empty the inventories. Implementing online NYOP auction could be a marketing strategy to attract more consumers, and more importantly, they can always make profits because the transaction can be only made when consumers’ bids above the reservation prices (equal to or above variable costs). What’ s even more interesting, maybe consumers would like to pay more than the posted prices they used to be charged.

 

References:

Bichler, “The Future of E-Commerce: Multidimensional Market Mechanisms”, Cambridge University Press, Cambridge, 2000.

Voigt, S and Hinz, Q ‘Assessing Strategic Behavior in Name-Your-Own-Price Markets’, International Journal of Electronic Commerce, Vol. 18, No. 3 (2014) 103–124.

http://lexicon.ft.com/Term?term=name_your_own_price

http://www.columbusweddingsmag.com/content/blogs/Bustled/2015/08/name-your-own-price-sale.html

https://paidtoexist.com/joy-someday-vs-joy-now-the-ultimate-yes-to-yourself/

http://www.priceline.com/promo/toughlove.asp