Measuring individual frictional costs and willingness-to-pay via name-your-own-price mechanisms

Abstract

Name-your-own-price is a pricing mechanism where the buyer instead of the seller determines the price, because the buyer makes a bid at a certain price, which the seller can either accept or reject. Based on consumers’ bidding behavior at a name-your-own-price seller, we develop and empirically test a model to simultaneously estimate individual willingness-to-pay (WTP) and frictional costs. Further, we compare analytically and empirically bidding behavior and profit implications of the single bid model to those of the repeated bidding model. Thereby, we derive closed form solutions for the optimal bids which describe the influence of willingness-to-pay and frictional costs on consumer's bidding behavior. In addition, we develop a procedure for estimating empirically willingness-to-pay and frictional costs for individual consumers. Finally, we discuss the findings and limitations as well as their implications for providers of name-your-own-price mechanisms.