Assessing Strategic Behavior in Name-Your-Own-Price Markets

Abstract

Name your own price (NYOP) is an interactive pricing mechanism in electronic commerce that lets both buyers and sellers influence the selling price of a product. Until now, research has focused mainly on optimizing either the buyer's or the seller's strategy, without considering learning effects or interactions between the two sides in the process. However, these aspects are vital: If participants behaved as game theory suggests (i.e., anticipating their counterpart's actions), buyers would place their bids very close to their assumption about the seller costs. In the long run, this may lead to deals at low prices, leaving sellers little surplus and thus no incentive to sell via NYOP. In this paper, we present a game-theoretical model that incorporates interactions between buyers and sellers as well as learning effects. We assess its applicability in a laboratory experiment simulating a common NYOP design. We find that sellers quickly learn to set lower reservation prices, which ultimately increases the total surplus. Buyers, realizing that they can close deals at lower prices, place lower bids over time. Their bids are based mainly on their knowledge of the seller's costs, not on their own willingness to pay. However, buyers are risk averse in that they prefer to settle a deal rather than break it off. These findings are good news for NYOP sellers and show that NYOP can be a sustainable pricing mechanism even in the long run.