The Value of Flexibility From Opaque Selling

42 Pages Posted: 19 Nov 2019

See all articles by Adam N. Elmachtoub

Adam N. Elmachtoub

Department of Industrial Engineering and Operations Research & Data Science Institute, Columbia University

David Yao

Columbia University

Yeqing Zhou

Columbia University - Department of Industrial Engineering and Operations Research & Data Science Institute

Date Written: November 8, 2019

Abstract

An opaque product is a product where some secondary attribute is not revealed to the customer until after purchase. Selling opaque products has become popular on e-commerce platforms where the hidden attribute is often color or style, thanks to its obvious advantage in risk pooling the demand. The objective of this study is to quantify the value of consumer flexibility that underlies opaque selling. We consider a setting in which an online retailer sells N products that only differ in a certain secondary attribute, and in addition offers a k-opaque option where customers select k products from which the seller allocates one to the customer. We assume that the prices are exogenously set such that q fraction of the customers select the k-opaque option. We refer to the tuple (q,k) as the degree of opacity, where the flexibility of the system is increasing in both q and k. When q=0 or k=1, our setting reduces to traditional non-opaque selling with no flexibility, and when the degree of opacity is (1,N), this corresponds to a fully flexible scenario where every customer is willing to receive any product.

We find that even with a minimal degree of opacity where q is very small and k=2, the seller can achieve significant cost savings which we quantify precisely. Remarkably, we find that the cost savings from this minimal degree of opacity is on the same order as the fully flexible case corresponding to (1,N). This finding has practical managerial implications, as achieving (1,N) is practically infeasible since it would require substantial incentives by the seller to materialize. Our proofs rely on analyzing a simple balancing policy to allocate products to opaque customers, and explores a novel connection to the balls-into-bins framework. As a byproduct of our analysis, we show that the simple balancing policy is asymptotically optimal. Finally, we provide numerical experiments that suggest our main insight, namely that a small degree of opacity provides advantages akin to a fully flexible system, holds under various extensions of our core setting.

Keywords: online retailing, opaque selling, flexibility

Suggested Citation

Elmachtoub, Adam and Yao, David and Zhou, Yeqing, The Value of Flexibility From Opaque Selling (November 8, 2019). Available at SSRN: https://ssrn.com/abstract=3483872 or http://dx.doi.org/10.2139/ssrn.3483872

Adam Elmachtoub

Department of Industrial Engineering and Operations Research & Data Science Institute, Columbia University ( email )

535F S.W. Mudd Building
500 West 120th Street
New York, NY 10027
United States

HOME PAGE: http://www.columbia.edu/~ae2516/

David Yao

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

Yeqing Zhou (Contact Author)

Columbia University - Department of Industrial Engineering and Operations Research & Data Science Institute ( email )

500 West 120th Street
New York, NY 10027

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