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

22 Pages Posted: 27 Aug 2010

See all articles by Dmitry Shapiro

Dmitry Shapiro

Department of Economics, Seoul National University

Date Written: August 26, 2010

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.

Keywords: NYOP, Priceline

JEL Classification: D49, L11

Suggested Citation

Shapiro, Dmitry, Profitability of a Name-Your-Own-Price Mechanism in the Case of Risk-Averse Buyers (August 26, 2010). Available at SSRN: https://ssrn.com/abstract=1666251 or http://dx.doi.org/10.2139/ssrn.1666251

Dmitry Shapiro (Contact Author)

Department of Economics, Seoul National University ( email )

San 56-1, Silim-dong, Kwanak-ku
Seoul 151-742

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