The role of customer expectations in name-your-own-price markets

Abstract

This research analyzes how consumers' bidding costs and expectations about the threshold price impact a Name-Your-Own-Price (NYOP) retailer. We find that an NYOP retailer's profit may increase if consumers learn the product's true price threshold distribution. Inaccurate expectations can be detrimental to the firm either if consumers are too optimistic (i.e., expect the threshold price to be lower, on average, than really is) OR if consumers are overly pessimistic (i.e., expect the price threshold to be much higher than it is in reality). Furthermore, if customers accurately anticipate the true distribution of threshold prices, a seller may benefit from either (1) rejecting profitable bids in order to induce higher expectations of the threshold price (and thus higher bids) or (2) accepting bids below its costs (in order to raise participation rates). Using data from a real-world NYOP retailer, we find that bidding behavior is consistent with our analytical predictions.