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

42 Pages Posted: 13 Nov 2003

See all articles by Hila Etzion

Hila Etzion

University of Michigan, Stephen M. Ross School of Business

Edieal J. Pinker

Yale School of Management

Abraham Seidmann

Boston University - Questrom School of Business; University of Rochester - Simon Business School

Date Written: September 2003

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.

Suggested Citation

Etzion, Hila and Pinker, Edieal J. and Seidmann, Abraham Avi, Analyzing the Simultaneous Use of Auctions and Posted Prices for On-Line Selling (September 2003). Available at SSRN: https://ssrn.com/abstract=468640 or http://dx.doi.org/10.2139/ssrn.468640

Hila Etzion

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Edieal J. Pinker (Contact Author)

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-436-8867 (Phone)

HOME PAGE: http://https://som.yale.edu/faculty/edieal-j-pinker

Abraham Avi Seidmann

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

University of Rochester - Simon Business School ( email )

Carol Simon Hall 3-333C
Rochester, NY 14627
United States
585-275-5694 (Phone)
585-275-9331 (Fax)

HOME PAGE: http://www.ssb.rochester.edu/fac/Seidmannav/

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