Newswise — The Internet has made online auction sites somewhat ubiquitous—and has facilitated the rise of name-your-own-price (NYOP) auctions, a few of which are quite popular and profitable. With NYOP auctions, as most prominently exemplified by Priceline, consumers bid on products or services without knowing the threshold price. If their bid exceeds the concealed threshold price, they receive the product at the amount they’ve bid.
New research by Scott Fay, assistant professor of marketing in the Whitman School of Management, and Juliano Laran, assistant professor of marketing at the University of Miami School of Business, finds that consumers’ expectations about how frequently the threshold price changes have an interesting effect on what consumers bid.
“The frequency at which the price threshold changes can significantly impact a bidder’s propensity to bid and their bidding behavior,” says Fay.
The two researchers found that when a bidder suspects the threshold price sometimes changes, but not too often, they use nonmonotonic bidding patterns—that is, patterns where sometimes the bid is increased from one bid to the next and sometimes the bid is decreased – which is not what one normally expects to see.
For example, Fay says: “rather than steadily increasing their bids over time in order to receive the product, bidders decrease their bids at some point in the process.” This is a nonmonotonic bidding pattern; it does not follow the expected sequence of ‘my bid did not work so I will bid higher.’ In other words, bidders become more likely to drop their bids when they believe there is a likelihood that the threshold price will change. However, as threshold price changes become very frequent or very infrequent, the probability of a dropped bid falls. Interestingly—and quite surprisingly—impatient bidders are more likely to decrease their bid than patient bidders. These observed bidding patterns, while somewhat unexpected and rather complex, do come close to maximizing the value consumers can obtain from NYOP auctions, and thus suggest that consumers are very strategic in how they bid.
“Past research has seemed to indicate that dropped bids—that is, decreasing a bid over time—is due to consumer irrationality or forgetfulness,” says Fay. “In contrast, we’ve found that drop bidding is part of an optimal bidding strategy for fully rational consumers.”
Fay’s research, published in Management Science, also shows that differing expectations about price changes impact consumer satisfaction. “This may be due to the perception that an increase in the probability of change makes the bidding process appear more favorable to the consumer,” explains Fay. “This perception allows consumers to believe they have the chance to get better prices, thereby increasing their overall satisfaction with the online auction process.”
Scott Fay is an assistant professor of marketing in the Whitman School of Management. He earned his PhD at the University of Michigan. Fay’s current research focuses on probabilistic selling, price competition, reverse auctions, E-commerce, the economics of information and industrial organization, and retail strategy.
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