Buy-It-Now or Take-a-Chance: Price Discrimination through Randomized Auctions

36 Pages Posted: 24 Nov 2011 Last revised: 31 Jul 2014

Elisa Celis

University of Washington

Gregory Lewis

Harvard University; National Bureau of Economic Research (NBER)

Markus M. Mobius

University of Michigan at Ann Arbor - School of Information; Microsoft Corporation - Microsoft Research New England; National Bureau of Economic Research (NBER)

Hamid Nazerzadeh

University of Southern California - Marshall School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: October 1, 2011

Abstract

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.

Keywords: Advertising, Auctions, Mechanism Design, Price Discrimination

JEL Classification: D44, L86

Suggested Citation

Celis, Elisa and Lewis, Gregory and Mobius, Markus M. and Nazerzadeh, Hamid, Buy-It-Now or Take-a-Chance: Price Discrimination through Randomized Auctions (October 1, 2011). NET Institute Working Paper No. 11-21. Available at SSRN: https://ssrn.com/abstract=1958032 or http://dx.doi.org/10.2139/ssrn.1958032

Elisa Celis

University of Washington ( email )

Seattle, WA 98195
United States

Gregory Lewis (Contact Author)

Harvard University ( email )

Littauer Center
Cambridge, MA 02138
United States
617-496-1526 (Phone)

HOME PAGE: http://www.economics.harvard.edu/faculty/lewis

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Markus M. Mobius

University of Michigan at Ann Arbor - School of Information ( email )

304 West Hall
550 East University
Ann Arbor, MI 48109-1092
United States

HOME PAGE: http://www.markusmobius.org

Microsoft Corporation - Microsoft Research New England ( email )

One Memorial Drive, 14th Floor
Cambridge, MA 02142
United States

HOME PAGE: http://www.markusmobius.org

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://www.markusmobius.org

Hamid Nazerzadeh

University of Southern California - Marshall School of Business ( email )

Bridge Memorial Hall
Los Angeles, CA 90089
United States

HOME PAGE: http://www-bcf.usc.edu/~nazerzad/

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