Online Auction and List Price Revenue Management

45 Pages Posted: 9 Oct 2008

See all articles by Rene Caldentey

Rene Caldentey

University of Chicago - Booth School of Business

Gustavo Vulcano

Universidad Torcuato Di Tella - School of Business

Date Written: April 2004

Abstract

We analyze a revenue management problem in which a seller facing a Poisson arriving stream of customers operates an online multiunit auction. Customers have an alternative list price channel where to get the product from. We consider two variants of this problem: In the first one, the list price is an external channel run by another firm. In the second variant, the seller manages simultaneously both the auction and the list price channels.

Each consumer, trying to maximize his own surplus, must decide either to buy at the posted price and get the item at no risk, or to join the auction and wait until its end, where the winners are revealed and the auction price is disclosed.

Our approach consists of two parts. First, we study structural properties of the problem, and show that the equilibrium strategy for both versions of this game is of the threshold type, meaning that a consumer will join the auction only if his arrival time is above a function of his own valuation.This consumer's strategy can be computed using an iterative algorithm in a function space, provably convergent under some conditions. Unfortunately, this procedure is computationally intensive.

To overcome this, we formulate an asymptotic version of the problem, in which the demand rate and the initial number of units grow proportionally large. We get a simple closed form for the equilibrium strategy in this regime, which is then used as an approximated solution for the original problem. Numerical computations show that this heuristic is very accurate. The asymptotic solution culminates then in simple and precise recipes for how bidders should behave, and how the seller should structure the auction, and price the product in the dual channel case.

Keywords: revenue management, strategic behavior, online auction, asymptotic, dual channel

Suggested Citation

Caldentey, Rene and Vulcano, Gustavo, Online Auction and List Price Revenue Management (April 2004). Information Systems Working Papers Series, Vol. , pp. -, 2004. Available at SSRN: https://ssrn.com/abstract=1281303

Rene Caldentey

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://www.chicagobooth.edu/faculty/directory/c/rene-caldentey

Gustavo Vulcano

Universidad Torcuato Di Tella - School of Business ( email )

Avda Figueroa Alcorta 7350
Buenos Aires, CABA 1428
Argentina

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