Online Haggling at a Name-Your-Own-Price Retailer: Theory and Application

Abstract

We present a formal model of haggling between a name-your-own-price retailer and a set of individual buyers. Rather than posting a price, the retailer waits for potential buyers to submit offers for a given product and then chooses to either accept or reject them. Consumers whose offers have been rejected can invest in additional haggling effort and increment their offers. This pricing model allows the name-your-own-price retailer to engage in price discrimination: As haggling is costly for the potential buyer, customers with a high willingness to haggle will achieve lower transaction prices. However, because haggling is costly, it reduces overall welfare and diminishes the benefits of price discrimination. Our study is motivated by several name-your-own-price retailers that have recently emerged on the Internet. Based on detailed transaction data of a large German name-your-own-price retailer, we present a model of consumer haggling. We then show how this model can be used to improve the decision making of the retailer, who needs to choose a threshold price above which all offers are accepted. Another decision variable for the retailer lies in the user interface design, which allows the retailer to either facilitate or to hinder the haggling of the consumer. AbstractWe present a formal model of haggling between a name-your-own-price retailer and a set of individual buyers. Rather than posting a price, the retailer waits for potential buyers to submit offers for a given product and then chooses to either accept or reject them. Consumers whose offers have been rejected can invest in additional haggling effort and increment their offers. The main advantage of this pricing model is that it allows the name-your-own-price retailer to engage in price discrimination: as haggling is costly for the potential buyer, customers with a high willingness to haggle will achieve lower transaction prices. Thus, haggling effort can be used as a self-selection mechanism to implement price discrimination. Our study is motivated by several name-your-own-price retailers that have recently emerged on the Internet. Based on detailed transaction data of a large German name-yourown-price retailer, we present a model of consumer haggling. We then show how this model can be used to improve the decision making of the retailer, who needs to choose a threshold price above which all offers are accepted. Another decision variable for the retailer lies in the user interface design, which allows the retailer to either facilitate or to hinder the haggling of the consumer.

The Name-Your-Own-Price Channel in the Travel Industry: An Analytical Exploration

“…Fay (2004), Hann and Terwiesch (2003), and Terwiesch, Savin, and Hann (2005) focus on the NYOP retailer's decision with regard to setting a minimum acceptable price and/or bidding rules. Fay (2008) uses a Hotelling model with two service providers to investigate the rationale for the existence of opaque products, although the model assumes that the retailer of the opaque product sells at a posted price, rather than employing a bidding mechanism characteristic of the NYOP pricing model.…”

“…Second, a single NYOP retailer serving the multiple competing service providers (consolidating supply across them) is likely to be more efficient than multiple serviceprovider owned NYOP outlets Our paper also allows an evaluation of the NYOP channel from both the consumers' and the service provider's perspectives. Previous studies attribute the existence of NYOP channel to consumers' haggling cost of repeat bidding (Terwiesch, Hann and Savin 2005). Our analysis adds new insights to the NYOP process as it examines optimal strategies for both the service provider and the consumers.…”

Delegating pricing power to customers: Pay What You Want or Name Your Own Price?

“…The majority of the related research focuses on NYOP sellers' design decisions such as repeated bidding and bidding fees (Fay, 2004;Spann et al, 2010), joint bidding for multiple items (Amaldoss and Jain, 2008), bid/price elicitation (Chernev, 2003;Spann et al, 2012) and haggling (Terwiesch et al, 2005). In addition, there are some papers studying the effects of competition on the profitability of a NYOP channel (Fay, 2009;Shapiro, 2011) and reasons for the existence of the channel itself (Wang et al, 2009).…”

“…Further, empirical research using historic NYOP bidding data analyzes bidder characteristics such as frictional costs (Hann and Terwiesch, 2003;Terwiesch et al, 2005), rationality (Spann and Tellis, 2006), risk aversion (Abbas and Hann, 2010) or willingness to pay (Spann et al, 2004).…”

Naming your own price mechanisms: Revenue gain or drain?

“…Ding et al (2005) construct a model that incorporates frustration and excitement in NYOP mechanisms and propose that frustration and excitement levels of consumers will vary over time based on past experiences, and that this variation in frustration and excitement will lead to fluctuations in bids over time. Finally, Terwiesch et al (2005) suggest that additional haggling time will keep those customers who are not price sensitive from cannibalizing profits. They also show that under certain conditions haggling profits will be higher than posted-price profits.…”