Buy-It-Now or Take-a-Chance: Price Discrimination through Randomized Auctions
36 Pages Posted: 24 Nov 2011 Last revised: 31 Jul 2014
Date Written: October 1, 2011
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: Suggested Citation