Buyer's Valuation Research Articles

Selling two goods optimally

We provide sufficient conditions for revenue maximization in a two-good monopoly where the buyer's values for the items come from independent (but not necessarily identical) distributions over bounded intervals. Under certain distributional assumptions, we give exact, closed-form formulas for the prices and allocation rule of the optimal selling mechanism. As a side result we give the first example of an optimal mechanism in an i.i.d. setting over a support of the form [0,b] which is not deterministic. Since our framework is based on duality techniques, we were also able to demonstrate how slightly relaxed versions of it can still be used to design mechanisms that have very good approximation ratios with respect to the optimal revenue, through a “convexification” process.

Robust contracting under common value uncertainty

A buyer makes an offer to a privately informed seller for a good of uncertain quality. Quality determines both the seller's valuation and the buyer's valuation, and the buyer evaluates each contract according to its worst-case performance over a set of probability distributions. This paper demonstrates that the contract that maximizes the minimum payoff over all possible probability distributions of quality is a screening menu that separates all types, whereas the optimal contract for any given probability distribution is a posted price, which induces bunching. Using the ε-contamination model, according to which the buyer's utility is a weighted average of his single prior expected utility and the worst-case scenario, the analysis further shows that for intermediate degrees of confidence, the optimal mechanism combines features of both of these contracts.

Social Interactions and Segregation in Public Housing Neighbourhoods in Singapore

This paper investigates cultural amenities and social interactions in Singapore’s resale public housing market. Based on a unique dataset on the Cash-Over-Valuation (COV), which measures differences between transaction prices and appraisal values, for a sample of 73,048 resale public housing transactions from 2007 to 2012, we find that COV per square meter (psm), which is a proxy for premiums that are above the “objective” values of houses, significantly increases with the fraction of a selected ethnic group in housing blocks. The results imply that buyers value social interactions and cultural affinity in housing blocks with high concentration of households of the same ethnic group. To live in a block with more than 90th percentile of residents from their own ethnic groups, Chinese or Malay buyers pay an additional SGD 98.74 and SGD 102.60 for COV per square meter (psm), respectively, which is equivalent to about 2.36% and 2.46%, respectively, of the average transaction prices. We also find that Chinese buyers pay SGD 43.63 more in COV psm in blocks with Chinese’s binding-quota, but pay SGD 11.24 and SGD 41.99 less in blocks with Malay’s and Indian’s binding-quotas, respectively. Lastly, we also show that additional COV are found relatively positive premiums for the within-ethnicity transactions relative to the cross-ethnicity transactions, which support the literature arguing on positive information spillovers and network effects between buyers and sellers of the same ethnicity group.

The Value of Green Certification in the Singapore Housing Market

In Singapore, a real estate developer sells new apartments in the same high-rise development before and after obtaining green certification. This allows the use of within-development variation in prices over time to measure the effect of green certification on housing prices, controlling for differences across developments. I find that green certification increases prices by around 3%, suggesting that buyers value certification, possibly because it signals the presence of less-salient green features. Moreover, the effect of certification is biggest for developments that receive the lowest green rating, which likely have fewer green features and are thus less obviously green.

The value of green certification in the Singapore housing market

In Singapore, a real estate developer sells new apartments in the same high-rise development before and after obtaining green certification. This allows the use of within-development variation in prices over time to measure the effect of green certification on housing prices, controlling for differences across developments. I find that green certification increases prices by around 3%, suggesting that buyers value certification, possibly because it signals the presence of less-salient green features. Moreover, the effect of certification is biggest for developments that receive the lowest green rating, which likely have fewer green features and are thus less obviously green.

Dynamic adverse selection with a patient seller

This paper considers dynamic bilateral trade with short-term commitment. We show that, when the seller is more patient than the buyer, there exist systematic differences between the optimal selling and renting mechanisms. While the former consists of simple price-posting, the latter induces the buyer to choose between a secure- and a random-delivery contract. Allowing for mechanisms more general than price-posting reduces the seller's cost of learning the buyer's valuation in the renting case. Renting leads to more learning than selling but (unless the horizon is sufficiently long) only when general mechanisms are available. Our results contrast with the common view that the restriction to price-posting is innocuous and that informational asymmetries are more persistent under renting than under selling.

Envy-Free Pricing in Large Markets

We study the classic setting of envy-free pricing, in which a single seller chooses prices for its many items, with the goal of maximizing revenue once the items are allocated. Despite the large body of work addressing such settings, most versions of this problem have resisted good approximation factors for maximizing revenue; this is true even for the classic unit-demand case. In this article, we study envy-free pricing with unit-demand buyers, but unlike previous work we focus on large markets: ones in which the demand of each buyer is infinitesimally small compared to the size of the overall market. We assume that the buyer valuations for the items they desire have a nice (although reasonable) structure, that is, that the aggregate buyer demand has a monotone hazard rate and that the values of every buyer type come from the same support. For such large markets, our main contribution is a 1.88-approximation algorithm for maximizing revenue, showing that good pricing schemes can be computed when the number of buyers is large. We also give a ( e ,2)-bicriteria algorithm that simultaneously approximates both maximum revenue and welfare, thus showing that it is possible to obtain both good revenue and welfare at the same time. We further generalize our results by relaxing some of our assumptions and quantify the necessary tradeoffs between revenue and welfare in our setting. Our results are the first known approximations for large markets and crucially rely on new lower bounds, which we prove for the revenue-maximizing prices.

EFFECT OF SUPPLY CHAIN FINANCE ON VALUE OF FIRMS IN THE SUPPLY CHAIN

This study aims to determine the effect of supply chain finance on firm value of large buyers with high credit notes. For this purpose, a two-stage application was performed. Firstly, panel data analysis applied with the data of 2.421 companies from 16 different countries among the G-20 members between 2009 and 2013 and the effect of variables which are affected theoretically by supply chain finance in large companies on firm value is examined. In the second stage of the application, 46 companies which started using supply chain finance between 2006 and 2013 have been identified. Wilcoxon signed-rank test was applied by using the data before and after year which the companies have been started to use supply chain finance and it is determined that whether the variables which is expected to be affected reveal a significant difference between these years. In conclusion, the effect of variables expected to be affected in large companies which make supply chain finance available for their suppliers on firm value differs for each market. Thus, it is concluded that supply chain finance will affect the firm value if the theoretical impacts are realized. However, the second part of the application shows that there is no significant difference in any of the variables before and after supply chain finance using. As a result, although theoretically it is expected that firm value of large companies located within the supply chain finance is affected, there is no effect on firm values in the markets.

Buyer-Optimal Learning and Monopoly Pricing

This paper analyzes a bilateral trade model where the buyer's valuation for the object is uncertain and she observes only a signal about her valuation. The seller gives a take-it-or-leave-it offer to the buyer. Our goal is to characterize those signal structures which maximize the buyer's expected payoff. We identify a buyer-optimal signal structure which generates (i) efficient trade and (ii) a unit-elastic demand. Furthermore, we show that every other buyer-optimal signal structure yields the same outcome as the one we identify: in particular, the same price. (JEL D11, D42, D82, D83, L12)

Teaching an Old Dog a New Trick: Reserve Price and Unverifiable Quality in Repeated Procurement

In procurement markets, unverifiable quality provision may be obtained either by direct negotiation or by competitive processes which discriminate firms on the basis of their past performance. However, discrimination is not allowed in many institutional contexts. We show that a non-discriminatory competitive process with a reserve price may allow the buyer to yield an efficient allocation of the contract and to implement the level of quality desired by the buyer. Quality enforcement arises out of a relational contract whereby the buyer threatens to set a 'low' reserve price in future competitive tendering processes if any contractor fails to provide the required quality. We study an infinitely repeated procurement model with many firms and one buyer imperfectly informed on the firms' cost, in which, in each period, the buyer runs a standard low-price auction with reserve price. We study the cases of players using grim trigger strategies, analysing both the case of a committed and uncommitted buyer. We find that a competitive process with reserve price is able to elicit the desired level of unverifiable quality provided that the buyer's valuation of the project is not too high and the value of quality is not too low; under these conditions, the buyer can credibly threaten the firms to set, in case a contractor fails to deliver the required quality level, a reserve price so low that no firm is willing to participate to the tender. A committed buyer can elicit the desired quality level for a wider range of preference parameters.

The challenge of communicating reciprocal value promises: Buyer-seller value proposition disparity in professional services

This study explores the communication of reciprocal value propositions in buyer-seller interaction and examines whether each party's value proposition is congruent with the value sought by their respective counterpart. Through 31 in-depth interviews with customers and salespeople from six professional service organizations, it was found that while both parties deliberately articulate value propositions, thereby initiating the co-creation process, there are some surprising disparities in the value dimensions offered by the salesperson. Although the customer's value proposition is largely consistent with the value sought by the seller, a marked discrepancy was encountered in the reverse case (i.e. between the seller's value proposition and the buyer's desired value). These findings indicate a significant misalignment between the seller's value proposition and actual co-creative behavior that can impede the subsequent collaboration and resource integration between the two parties, which could lead to customer dissatisfaction and potentially even service failure.

Interim Optimal Trading for an Informed Seller

A seller with perfect monopoly power trades an indivisible object with a buyer. Both the seller's and the buyer's valuations for the object depend on its quality, which is privately known by the seller. Moreover, the seller has perfect information about the buyer's valuation for each quality. Even though posting a fixed price is ex ante optimal, it is not necessarily implementable because it might not be interim individually rational. The set of implementable interim optimal mechanisms is characterised by solving a parametric linear maximisation program. These mechanisms might differ from simple price-posting. If the seller offers the mechanism, then mechanisms that are not interim optimal can be supported as equilibrium mechanisms. However, this sub-optimality result seems not to be robust if there are at least two buyers who can make counter-offers of mechanisms after the seller's offer. In that case, a mechanism offered by the seller is an equilibrium mechanism if and only if it is interim optimal.

Teaching an Old Dog a New Trick: Reserve Price and Unverifiable Quality in Repeated Procurement

In procurement markets, unverifiable quality provision may be obtained either by direct negotiation or by competitive processes which discriminate firms on the basis of their past performance. However, discrimination is not allowed in many institutional contexts. We show that a non-discriminatory competitive process with a reserve price may allow the buyer to yield an efficient allocation of the contract and to implement the level of quality desired by the buyer. Quality enforcement arises out of a relational contract whereby the buyer threatens to set a `low' reserve price in future competitive tendering processes if any contractor fails to provide the required quality. We study an infinitely repeated procurement model with many firms and one buyer imperfectly informed on the firms' cost, in which, in each period, the buyer runs a standard low-price auction with reserve price. We study the cases of players using grim trigger strategies, analysing both the case of a committed and uncommitted buyer. We find that a competitive process with reserve price is able to elicit the desired level of unverifiable quality provided that the buyer's valuation of the project is not too high and the value of quality is not too low; under these conditions, the buyer can credibly threaten the firms to set, in case a contractor fails to deliver the required quality level, a reserve price so low that no firm is willing to participate to the tender. A committed buyer can elicit the desired quality level for a wider range of preference parameters.

Spectrum Auction for Differential Secondary Wireless Service Provisioning With Time-Dependent Valuation Information

In this paper, we propose a spectrum auction mechanism for secondary spectrum access in cognitive radio networks. Different from existing works in the literature, the time-dependent buyer valuation information is employed in the proposed mechanism so that the primary spectrum owner (PO) can determine more favorable spectrum allocations and pricing functions in order to maximize the expected auction revenue. In addition, to exploit the temporal spectrum reusability, the proposed mechanism allows each secondary wireless user to declare its specific time preferences, including service starting time, delay tolerance, and service length. By further considering the heterogeneities in secondary wireless service provisioning, the proposed mechanism is able to support heterogeneous forms (continuous or disjointed spectrum usages) of secondary spectrum requests. Specifically, at the beginning of the auction frame, secondary wireless users report their different spectrum usage requests along with the bidding prices, while the PO decides a single-step spectrum allocation and calculates the payment for each winner based on not only the received bids but also the known time-dependent valuation information. Theoretical analyses and simulation results show that the proposed auction mechanism can satisfy all desired economic properties, and can improve the spectrum allocation efficiency and auction revenue compared with counterparts.

Sequential negotiations with loss-averse buyers

This paper analyzes sequential negotiations with exogenous breakdown risk between a risk-neutral seller and a loss-averse buyer who is privately informed about his valuation. I show that, compared to the risk-neutral benchmark, loss aversion on the buyer's side softens the rent-efficiency trade-off for the seller. The reason is that the higher the buyer's valuation is, the more he has to lose by rejecting the seller's offer. Thus, in equilibrium the seller's profits and overall efficiency are both higher than in the risk-neutral case. Moreover, I also show that loss aversion has a redistributive effect by increasing the equilibrium payoff of some low-valuation buyers and decreasing that of high-valuation ones.

Robust screening under ambiguity

We consider the problem of screening where a seller puts up for sale an indivisible good, and a buyer with a valuation unknown to the seller wishes to acquire the good. We assume that the buyer valuations are represented as discrete types drawn from some distribution, which is also unknown to the seller. The seller is averse to possible mis-specification of types distribution, and considers the unknown type density as member of an ambiguity set and seeks an optimal pricing mechanism in a worst case sense. We specify four choices for the ambiguity set and derive the optimal mechanism in each case.

Industrial Ingredient Co-branding: A Brand Relationship Approach

<p>Existing research on industrial ingredient co-branding alliances has largely focused on the functional and<br />transactional value that ingredient brands provide to ingredient buyers and sellers. The current research draws on the brand relationship perspective to investigate how the relational assets of ingredient brands generate value for both ingredient buyers and for the ingredient supplier itself. For the former, such value manifests in ingredient co-branding value, and for the latter, the value lies in brand equity. The results are derived from a survey of 107 ingredient buyers from a multinational ingredient manufacturer aiming to initiate ingredient co-branding agreements in the energy component industry. The results of the structural equation model reveal that ingredient brand trust directly affects both ingredient brand loyalty and ingredient co-branding value, but indicate no significant effect between brand loyalty and ingredient co-branding value. Moreover, ingredient co-branding value proved to be a driver of ingredient supplier brand equity.</p>

Can I read your mind? Perception gaps in supply chain relationships

A buyer-dominant perspective in the existing buyer-supplier relationship literature reflects a common yet implicit “bilateral expectation” assumption. However, dyadic studies have revealed that the parties in a relational exchange may possess divergent views on many issues, which violates the bilateral expectation assumption and motivate this research. In contrast to existing dyadic scholarship, which focuses on divergent buyer and supplier views of the same event or phenomenon, this study examines gaps between what the supplier thinks the buyer’s perspective is vs. what the buyer’s perspective actually is. Specifically, this study examines gaps between the buyer’s stated relational outcomes (regarding opportunism and relationship continuance) and the supplier’s expectation of the buyer’s actual behavior. The study uses a scenario-based experiment with mirrored vignettes to elicit data from both sides of the relational exchange. The results suggest that in general, the supplier tends to overestimate the buyer’s desire to continue an existing relationship. Moreover, when making relationship continuance decisions, the buyer tends to value relational norms more than dependence, which is counter to supplier expectations (i.e., the supplier would expect that the buyer values dependence more). The findings have important implications for how managers can effectively navigate supply chain relationships in general, and suppliers’ interactions with buyers in particular.

The ‘transaction X-ray’: understanding construction procurement

This paper presents the results of a case study, the Construction Case, which examines procurement practices within the UK construction supply chain and compares these with a more general UK sample taken from non-construction sectors. Using a qualitative methodology, the approaches to relationship management and buyer value perception are graphically mapped, using an innovative ‘transaction X-ray’ technique. The Construction Case considers procurement transactions conducted at various points along the construction value chain: the client, the construction firm and the specialist contractor. Recognising that the research design favours a small sample size, and thus limits generalisability beyond the boundaries of the case, the paper finds that construction industry procurement operates in an adversarial and largely arm’s-length manner. While procurement practice is found to share common aspects with other industrial sectors, the case demonstrates that the construction industry is more adversarial and less collaborative than is the average found across the other sectors examined. The paper outlines a useful framework whereby construction practitioners can evaluate elements of procurement practice within their own organisations, and also signposts the required direction for future research in order to reflect the gap, suggested by the case, between current normative theory and construction procurement practice.

Entry Deterrence in Dynamic Second-Price Auctions

We examine a dynamic second-price auction with independent private values and sequential costly entry. We show that delayed revelation equilibria exist in which some buyers place coordinated low early bids. These buyers revise their bids to reflect their true valuations just prior to the end of the auction. Compared to the benchmark immediate revelation equilibrium, in which buyers bid their valuations immediately after entry, fewer high-value bidders enter on expectation in the delayed revelation equilibria. Delayed revelation of buyer values decreases social welfare, but is necessary for bidders to have a strict participation incentive. (JEL D44, D82, D83)