Buy-it-Now or Take-a-Chance: Price Discrimination through Randomized Auctions
University of Washington
Harvard University; National Bureau of Economic Research (NBER)
Markus M. Mobius
Harvard University - Department of Economics; National Bureau of Economic Research (NBER)
University of Southern California - Marshall School of Business
October 1, 2011
NET Institute Working Paper No. 11-21
Increasingly detailed consumer information makes sophisticated price discrimination possible. At fine levels of aggregation, demand may not obey standard regularity conditions. We propose a new randomized sales mechanism for such environments. Bidders can "buy-it-now" at a posted price, or "take-a-chance" in an auction where the top d > 1 bidders are equally likely to win. The randomized allocation incentivizes high valuation bidders to buy-it-now. We analyze equilibrium behavior, and apply our analysis to advertiser bidding data from Microsoft Advertising Exchange. In counterfactual simulations, our mechanism increases revenue by 4.4% and consumer surplus by 14.5% compared to an optimal second-price auction.
Number of Pages in PDF File: 41
Keywords: Advertising, Auctions, Mechanism Design, Price Discrimination
JEL Classification: D44, L86working papers series
Date posted: November 24, 2011 ; Last revised: November 26, 2012
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