Optimal Reverse-Pricing Mechanisms

34 Pages Posted: 2 Apr 2010

See all articles by Martin Spann

Martin Spann

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management)

Robert Zeithammer

University of California, Los Angeles (UCLA) - Anderson School of Management

Gerald Häubl

University of Alberta - Department of Marketing, Business Economics & Law

Date Written: February 19, 2010

Abstract

Reverse pricing is a market mechanism under which a consumer’s bid for a product leads to a sale if the bid exceeds a hidden acceptance threshold the seller has set in advance. The seller faces two key decisions in designing such a mechanism: First, he must decide where in the process to collect the revenue - that is, whether to commit to a minimum markup above cost (and thus define the bid-acceptance threshold given cost) and whether to set a fee for the consumer’s right to bid. Second, the seller must decide whether to facilitate or hinder consumer learning about the current bid-acceptance threshold. We analyze these decisions for a profit-maximizing small intermediary retailer selling to consumers who can also purchase the product in an outside posted-price market. The optimal revenue model is to charge a fee for the right to bid and then accept all bids above cost, rather than to set a positive minimum markup above cost. Avoiding minimum markups in favor of a bidding fee is more profitable because of increased efficiency arising from more entry by consumers and higher bids by the entrants. When consumers learn about the bid-acceptance threshold before they enter the market, efficiency increases further, and generating revenue through a bidding fee can compensate the seller for his loss of information rent when the competition from the outside posted-price firm is relatively weak.

Keywords: reverse pricing, name-your-own-price, analytical modeling, e-commerce

JEL Classification: D44, D2

Suggested Citation

Spann, Martin and Zeithammer, Robert and Häubl, Gerald, Optimal Reverse-Pricing Mechanisms (February 19, 2010). Available at SSRN: https://ssrn.com/abstract=1581549 or http://dx.doi.org/10.2139/ssrn.1581549

Martin Spann

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management) ( email )

Ludwigstr. 28
Munich, 80539
Germany

Robert Zeithammer (Contact Author)

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Gerald Häubl

University of Alberta - Department of Marketing, Business Economics & Law ( email )

Edmonton, Alberta T6G 2R6
Canada

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