Profitability of a Name-Your-Own-Price Mechanism in the Case of Risk-Averse Buyers

Abstract:     
In the paper I study profitability of the name-your-own-price mechanism (NYOP) in the presence of risk-averse buyers. First, I provide conditions that guarantee that for the monopolistic seller the NYOP is more profitable than the posted-price. Second, I consider a more competitive framework where buyers with rejected bids have access to an alternative option. I show that if under the posted-price scenario there are unserved customers with low valuations then NYOP is more profitable than the posted-price. Finally, I study whether adding the posted-price option to the NYOP will further increase the seller's profit. I show that for DARA utility and a monopolistic seller it does not. In the presence of an alternative option the answer depends on whether buyers consider the posted-price option and the alternative option to be close substitutes or not. Adding the posted-price option will increase the profit in the former case and will not in the latter.

Number of Pages in PDF File: 22

Keywords: NYOP, Priceline

JEL Classification: D49, L11

working papers series