Electron Markets (2010) 20:119–129 DOI 10.1007/s12525-010-0033-z FOCUS THEME Name-Your-Own-Price seller’s information revelation strategy with the presence of list-price channel Tuo Wang & Michael Y. Hu & Andy Wei Hao Received: 25 August 2009 /Accepted: 23 February 2010 /Published online: 29 April 2010 # Institute of Information Management, University of St. Gallen 2010 Abstract This study examines the Name-Your-Own-Price is low (high expected consumer surplus from buying at list (NYOP) retailer’s information revelation strategy when price); (3) provide both the upper and lower bound of its competing with list-price channel. We propose an integrated threshold price when consumer surplus of buying at list economic framework focusing on the comparison of price is unknown. expected consumer surplus from bidding at NYOP auction and guaranteed consumer surplus from buying at a list Keywords Name-Your-Own-Price (NYOP) . Auctions . price. We then conduct an empirical study to examine the E-tailing . Multi-channel selling effects of seller-supplied price information on NYOP bidding outcome (especially on expected winning proba- JEL D4 bility and the number of bidders). The results of our study strongly indicate the effects of seller-supplied information on expected winning probability (as well as the expected Introduction consumer surplus) in a NYOP auction. We also illustrate the strategic implications of seller-supplied price informa- With the advance of Internet and computer technologies, tion via a revenue simulation for the NYOP seller. Our many products and services are now offered in non- results suggest that NYOP seller may increase his expected traditional pricing formats. One of the most innovative revenue by (1) provide only the upper bound of its pricing mechanisms is Name-Your-Own-Price (NYOP) threshold price when list price is high (low expected exemplified by Priceline.com. This format is quite different consumer surplus from buying at list price); (2) provide from traditional pricing practices. Instead of the seller only the lower bound of its threshold price when list price setting the price so that buyers choose to buy or not buy at a list price, every buyer can now indicate a price (a bid) that Responsible editor: Martin Spann he/she is willing to pay so that the seller can choose to T. Wang (*) accept or reject this bid. There also exist significant Kent State University, differences among NYOP practices. One of them is the Room 532, BSA, allowed rounds of bidding. If the NYOP bidding can be Kent, OH 44242, USA repeated, it is multiple-bid NYOP (such as a German travel e-mail: [email protected] firm discussed in Spann and Tellis 2006); otherwise, it A. W. Hao becomes a single-bid NYOP (this is Priceline’s bidding University of Hartford, policy). In this paper, we focus on the single-bid mecha- 200 Bloomfield Avenue, nism which is adopted by Priceline.com. Although NYOP West Hartford, CT 06117, USA e-mail: [email protected] is similar to auction, differences are significant (Chernev 2003): (1) bidders do not compete directly among them- M. Y. Hu selves. All bids are compared to a certain threshold price Kent State University, known only to the seller; (2) the lack of a clearly defined Room 526, BSA, Kent, OH 44242, USA reference price (opening bid, appraised value, etc.): bidders e-mail: [email protected] name a price without an explicitly available reference point. 120 T. Wang et al. On the other hand, the NYOP seller has the option to We look at the information revelation strategy (the provide any other reference price points, if doing so is choice of reference point format) of the NYOP seller under likely to increase his revenue. In fact, Chernev (2003) different scenarios. Specifically, we examine two issues: found that consumer preference for a NYOP method (1) The effects of seller-supplied price information on increases when a readily available reference price range is bidders’ expected winning probability and their provided (due to the easiness of decision). He also expected consumer surplus. suggested that NYOP seller can benefit from offering (2) The effects of list price (or guaranteed consumer reference price points by creating an easier NYOP process surplus) on the revenue of a NYOP seller and his for bidders. Although easiness of decision is a major information revelation strategy. concern for potential customers, we believe that the appeal of NYOP channel ultimately depends on the economic Our main focus of this paper is on the implications for a incentive when compared to list price channel. Extant NYOP seller when different information formats are literature is not consistent, however, on the economic presented to potential consumers. Unlike Ding et al. effects of seller-supplied reference price in an auction: (2005) and Wolk and Spann (2008) where bid propensity significant positive correlation between reference price and or purchase intention is measured, we induce the bid valuation/bids is reported by Kamins et al.(2004) under propensity by comparing respective consumer surpluses eBay style auction, Wolk and Spann (2008) find only under buying at list price and bidding at NYOP auction. limited influence on bidders’ value in an interactive NYOP With our understanding of these effects of seller-supplied auction. In addition, they find such effects are moderated by information, it is possible to evaluate information revelation the believability of seller-supplied reference price. Besides policies to enhance a NYOP seller’s revenue. the bid value submitted by consumers, the number of This paper is organized as follows. First, we construct a auction participants is another important factor for NYOP conceptual framework of the NYOP mechanism based on seller’s revenue. Contrary to traditional list price format, the basic economics of expected consumer surplus. Second, Kamins et al. (2004) and Wolk and Spann (2008) both we empirically investigate the effects of price information show that the presence of a seller-supplied reference price formats on consumers’ perceived value, bids and expected significantly decrease the number of participants in an eBay winning probability. Finally, we perform a revenue simu- style auction or the purchase intention in an NYOP style lation to illustrate the appropriate information revelation auction, respectively. It is believed that people with lower strategy for a NYOP seller. valuation no longer expect to win and will drop from the auction due to lower expected consumer surplus (Wolk and Spann 2008). Although Wolk and Spann (2008) found Literature review limited influence of seller-advertising reference prices, they also recognized that different forms of providing reference As a new pricing mechanism, NYOP is catching academic prices to bidders could help NYOP sellers to positively interest due to its uniqueness and its potential to be an influence consumers. important outlet for the service industry. Previous research Because a NYOP seller’s revenue is the sum of all on the NYOP model has focused on three separate issues: accepted bids, it is important to know the combined effects of seller-supplied reference price on the revenue of an (1) The optimal design of NYOP auction: whether to NYOP seller. Providing reference price makes economic allow repeat bidding (Fay 2004) and the estimation of sense to the seller only when revenue goes up with both the haggling cost for NYOP bidders (Hann and Terwiesch final bid value and number of bidders taken into consider- 2003); ation. Such a study requires a comprehensive economic (2) The rationality and emotion of bidders at the NYOP framework by explicitly investigate the expected consumer channel (Spann and Tellis 2006; Ding et al 2005). surplus in a NYOP auction when compared to that of Their findings also showed that as popular as NYOP buying at a list price. might be, it is relatively new and little is known about In this paper, we intend to answer the following its impact on the market; and questions for a NYOP seller: (3) The effect of reference price on NYOP bidding behaviours: Using experimental data, Chernev (2003) & Would the NYOP seller be better off by providing showed that by providing an external reference price reference price information to the bidders? range, consumers are more likely to favor naming a & If so, what form of reference price information should price than the condition under which reference price be provided to the bidders under different list price range is absent. He suggested that the NYOP seller levels to increase revenue for the NYOP seller? should make bidding easier by providing a readily Name-Your-Own-Price seller’s information revelation strategy with the presence of list-price channel 121 available reference price range. Wolk and Spann list price or participating in NYOP auction, the comparison (2008) showed that doing so have only limited impact of consumer surplus between the two alternatives creates a on NYOP bidders, with the effects moderated by foundation for calculating their bid propensity at NYOP believability of reference price information. auction. Economics auction theory suggested that it was benefi- Pricing literature lends substantial support for the impact cial for the seller not to intentionally hide information from of both internal and external reference prices on consumers’ bidders (Milgrom and Weber 1982). As noted by Levin and buying behavior (see Monroe 2003) and bidding behavior Smith (1994), traditional auction theory assumes a fixed (i.e. Kamins et al. 2004). With final bid as the outcome of number of bidders when comparing expected revenue from eBay styled English auction, it was found to be greatest different auction designs. The focus of these studies was on when only a high external reference price was presented, the bid price itself. When number of bidders (auction entry) lowest when only a low external reference price was is considered, Levin and Smith (1994) found that revealing presented, in the middle when the seller did not commu- seller’s minimum acceptable price discourage entry.