Measuring individual frictional costs and willingness-to-pay via name-your-own-price mechanisms

Name-your-own-price is a pricing mechanism where the buyer instead of the seller determines the price, because the buyer makes a bid at a certain price, which the seller can either accept or reject. Based on consumers’ bidding behavior at a name-your-own-price seller, we develop and empirically test a model to simultaneously estimate individual willingness-to-pay (WTP) and frictional costs. Further, we compare analytically and empirically bidding behavior and profit implications of the single bid model to those of the repeated bidding model. Thereby, we derive closed form solutions for the optimal bids which describe the influence of willingness-to-pay and frictional costs on consumer's bidding behavior. In addition, we develop a procedure for estimating empirically willingness-to-pay and frictional costs for individual consumers. Finally, we discuss the findings and limitations as well as their implications for providers of name-your-own-price mechanisms.

[1]  Steven M. Shugan.  The Cost Of Thinking , 1980 .

[2]  Alexander Chernev,et al.  Reverse Pricing and Online Price Elicitation Strategies in Consumer Choice , 2003 .

[3]  M. Rothschild,et al.  Searching for the Lowest Price When the Distribution of Prices Is Unknown , 1974, Journal of Political Economy.

[4]  B. Skiera,et al.  Measuring Consumers' Willingness to Pay at the Point of Purchase , 2002 .

[5]  Joel Huber,et al.  Emotional Bidders - An Analytical and Experimental Examination of Consumers' Behavior in a Priceline-Like Reverse Auction , 2005, Manag. Sci..

[6]  Yannis Bakos,et al.  Bundling Information Goods: Pricing, Profits and Efficiency , 1998 .

[7]  Scott Fay,et al.  Partial-Repeat-Bidding in the Name-Your-Own-Price Channel , 2004 .

[8]  M. Weitzman.  Optimal search for the best alternative , 1978 .

[9]  S. Dhami.  ECONOMICS OF INFORMATION , 2004 .

[10]  J. Johansson,et al.  Determinants of Search for Lower Prices: An Empirical Assessment of the Economics of Information Theory , 1978 .

[11]  Martin Spann,et al.  The ability to compensate for suboptimal capacity decisions by optimal pricing decisions , 1999, Eur. J. Oper. Res..

[12]  M. Ben-Akiva,et al.  Combining revealed and stated preferences data , 1994 .

[13]  B. Ratchford.  Cost-Benefit Models for Explaining Consumer Choice and Information Seeking Behavior , 1982 .

[14]  William Vickrey,et al.  Counterspeculation, Auctions, And Competitive Sealed Tenders , 1961 .

[15]  M. Degroot,et al.  Measuring utility by a single-response sequential method. , 1964, Behavioral science.

[16]  G. Tellis,et al.  Strategic Bundling of Products and Prices: A New Synthesis for Marketing , 2002 .

[17]  Dale J. Menkhaus,et al.  Using Laboratory Experimental Auctions in Marketing Research: A Case Study of New Packaging for Fresh Beef , 1993 .

[18]  Louis Phlips,et al.  The Economics of Price Discrimination , 1983 .

[19]  Christian Terwiesch,et al.  Measuring the Frictional Costs of Online Transactions: The Case of a Name-Your-Own-Price Channel , 2003, Manag. Sci..