Analyzing the Simultaneous Use of Auctions and Posted Prices for On-Line Selling

Abstract

Many firms in the business to consumer market sell identical products online using auctions and posted prices at the same time. In this paper, we develop and analyze a model of the key tradeoffs sellers face in such a dual-channel setting that is built around the interplay of three design parameters, the posted price, the auction lot size, and the auction duration. Our results show that a monopolist seller can increase his revenues by offering auctions and a fixed price concurrently, and we identify when either a posted price only or a dual channel strategy is optimal for the seller. We model consumer choice of channels, and thus market segmentation, and find that consumers who value the item for more than its posted price use a threshold policy to choose between the two channels. The threshold defines an upper bound on the remaining time of the auction. We explain how optimizing the design parameters enables the seller to effectively segment the market so that the two channels reinforce each other and cannibalization is mitigated. Our findings also demonstrate that there are two dominant auction design strategies in this setting: one-unit auctions that tend to be short and long multi-unit auctions. Which of these two strategies is optimal for the seller depends on the consumer arrival rate and the disutility of delivery delay incurred by high valuation consumers. In either case, the optimal auction design of the dual channel can significantly outperform a single posted price channel. Our results indicate that the seller's surplus from offering auctions is lower when consumers are more sophisticated in estimating their expected discount from participating in the auction.