Seller's Reservation Price Research Articles

The Role of Dependence Relationships in the Value Capture Process

We view the firm as a complex system and deploy Emerson’s power dependence theory to explain who captures value in deals between the firm and its suppliers and customers. The value realised in a deal is the difference between the buyer and seller reservation prices and dependence is a function of need strength and the availability of alternative deals. We argue that prices are the outcome of perceived dependence relationships between buyer and seller. Dependence on the focal deal is based on the buyer or seller’s subjective judgements concerning the use value being traded, the other party’s dependence and the availability of alternative deals. We develop eight value levers which firms can deploy to improve their dependence relationships. We then use this value capture perspective to address three questions: 1) should firms pursue generic strategies? 2) what is a valuable resource? 3) how should firms approach strategic change? We conclude that any change or resource which enhances the firm’s dependence relationships improves firm performance.

Identification in ascending auctions, with an application to digital rights management

This study provides new identification and estimation results for ascending (traditional English or online) auctions with unobserved auction‐level heterogeneity and an unknown number of bidders. When the seller's reserve price and two order statistics of bids are observed, we derive conditions under which the distributions of buyer valuations, unobserved heterogeneity, and number of participants are point identified. We also derive conditions for point identification in cases where reserve prices are binding and present general conditions for partial identification. We propose a nonparametric maximum likelihood approach for estimation and inference. We apply our approach to the online market for used iPhones and analyze the effects of recent regulatory changes banning consumers from circumventing digital rights management technologies used to lock phones to service providers. We find that buyer valuations for unlocked phones dropped by 39% on average after the unlocking ban took effect, from $231.30 to $141.50.

Information, Stochastic Dominance and Bidding: The Case of Treasury Auctions

We explore the link between informativeness of signals, stochastic dominance and equilibrium bids in a multi-unit auction with risk averse bidders. We show that for a particular class of signal distributions, there is a one-to-one relation between informativeness and conditional first-order stochastic dominance, so that a higher degree of informativeness in the signal-fundamental distribution corresponds to higher bids and therefore higher revenues. Finally, we consider a Walrasian bookbuilding auction and show that in such an auction, bidders may collude to push the price down to the seller's reservation price, regardless of the signals.

Managing the Revenue of Sales Platforms: Insights into Service Fees

Online sales platforms have grown substantially in recent years. These platforms assist sellers to conduct sales, and in return, collect service fees from sellers. We study the fee policies by considering a fee‐setting platform, on which a seller may conduct a sale with a reserve price to a group of potential buyers: the seller retains the object for sale if the final trading price is below the reserve price. The platform may charge two types of fees as in current practice: a reserve fee as a function of the seller's reserve price and a final value fee as a function of the sale's final trading price. We derive the optimality condition for fee policies, and show that the platform can use either just a final value fee or just a reserve fee to achieve optimality. In the former case, the optimal final value fee charged by the platform is independent of the number of buyers. In the latter case, the optimal reserve fee is often a decreasing, instead of increasing, function of the seller's reserve price. An increasing reserve fee may make the seller reluctant to use a positive reserve price and hurt the platform's revenue. In general, the optimal fees are nonlinear functions, but in reality, linear fees are commonly used because of their simplicity for implementation. We show that a linear fee policy is indeed optimal in the case that the seller's valuation follows a power distribution. In other cases, our numerical analysis suggests close‐to‐optimal performance of the linear policy.

Optimal Pricing Strategy in the Case of Price Dispersion: New Evidence from the Tokyo Housing Market

We adopt a multistage search model, in which the home seller's reservation price is determined by her or his opportunity cost, search cost, discount rate and additional market parameters. The model indicates that a greater dispersion in offer prices leads to higher reservation and optimal asking prices. A unique dataset from the Tokyo condominium resale market enables us to test those modeled hypotheses. Empirical results indicate that a one percentage point increase in the standard deviation of submarket transaction prices results in a two‐tenths of a percent increase in the initial asking price and in the final transaction price. Increases in the dispersion of market prices enhance the probabilities of a successful transaction and/or an accelerated sale.

In This Issue

In This Issue

Reference Prices as Determinants of Business‐to‐Business Price Negotiation Outcomes: An Empirical Perspective from the Chemical Industry

Price negotiations in supply chain relationships often take place during annual pricing reviews. This study integrates transaction cost economics and reference price thinking from consumer behavior to understand better how a seller's reservation price, aspiration price, and initial price offering might influence the ultimate settlement price. We apply ridge regression to negotiation data from 282 business relationships of aGerman chemicals supplier with customers in six client industries. Overall, the three determinants explain 86 percent of the variation in the settlement price. A seller's reservation price is substantially less important than the aspiration price or the initial price offering. Although this outcome can be explained via a reference price perspective, transaction cost economics theory helps clarify the industry differences that determine the impact of reservation prices and initial price offerings on settlement prices.

Simultaneous online auctions: decisions on reserve prices

The simultaneous nature of online auctions changes the horizon a bidder faces. A seller then has to make strategic and/or operational changes in order to adapt. In this study, a three-stage game model is constructed to analyse seller reserve price setting decision in online auctions. The decision of whether a seller should set a reserve price is shown to be a function of the covariance (between expected seller profits and expected rivals) and the expected number of bidders, where the covariance term is jointly determined by possible actions of other sellers.

List Prices, Sale Prices and Marketing Time: An Application to U.S. Housing Markets

Many goods are marketed after first stating a list price, with the expectation that the eventual sales price will differ. In this article, we first present a simple model of search behavior that includes the seller setting a list price. Holding constant the mean of the buyers’ distribution of potential offers for a good, we assume that the greater the list price, the slower the arrival rate of offers but the greater is the maximal offer. This trade‐off determines the optimal list price, which is set simultaneously with the seller's reservation price. Comparative statics are derived through a set of numerical sensitivity tests, where we show that the greater the variance of the distribution of buyers’ potential offers, the greater is the ratio of the list price to expected sales price. Thus, sellers of atypical goods will tend to set a relatively high list price compared with standard goods. We test this hypothesis using data from the Columbus, Ohio, housing market and find substantial support. We also find empirical support for another hypothesis of the model: atypical dwellings take longer to sell.

Managing information diffusion in Name-Your-Own-Price auctions

In Name-Your-Own-Price auctions (NYOP) prospective buyers bid against a secret reserve price set by the seller and only win the auction at the price of their bid if it is equal or higher than the seller's reserve price. Thus, bidders who want to win the auction without too much overbidding have a strong incentive to learn more about the seller's secret reserve price, possibly via their own network of friends, digital networks or online communities. Information sharing and information diffusion in digital networks can change bidding behavior and thus have important implications for sellers in NYOP markets. We develop a decision support system that enables sellers to assess the impact of information diffusion and to analyze the profitability of different seller strategies. We build the system from the bottom up by developing and testing a model of agents' bidding behavior which constitutes the basis for analyzing the effects of different network structures and seller strategies on profit. Sellers can react to information diffusion by setting the secret reserve price optimally, taking into account this strategic element by the provision of a forum and by decreasing the quality of information through forum intervention. Our results show that information diffusion can either decrease or increase seller profit depending on the buyers' initial beliefs about the seller's costs. We also show that the structure of the underlying social network is an important driver for information diffusion and that data about social networks might hence be of value to decision makers.

A Socio-Economic Analysis of French Public Timber Sales

This socio-economic study aims to better understand the functioning and the evolution of timber sales held by the French public forest service. The auction system is the historical institution which has been used for timber sales in France for centuries. The recent trend to develop supply contracts through private agreements has a major impact on the French timber industry, which is criticized for its lack of competitiveness. It accurately raises questions about the timber price issue. Indeed, the auction system plays an important role in price setting. We refer to the auction theory literature to examine the features of French timber auctions: first-price sealed-bid sequential auctions of heterogeneous standing timber lots. In particular, we note that seller's reserve price is kept secret and that, contrary to the general assumption in auction theory, the seller indubitably lacks information about his own reservation value. Finally, the difficulty of defining a “fair market price” remains a central issue in public timber sales.

Sale of a Deteriorating Asset via Sequential Search

We consider the sale of an asset via sequential search over a finite time horizon and analyze the problem in both the posted price and the reservation price regimes. The distinguishing feature of this search model is the fact that the asset deteriorates with the passage of time. Under mild conditions, we show that the seller's optimal posted price (and the seller's optimal reservation price) per remaining unit of the asset decreases as time passes.

A REASSURING MECHANISM DESIGN FOR TRADERS IN ELECTRONIC GROUP BUYING

Group buying is seen as an effective form of electronic commerce and a promising field for applying agent technologies. In current volume discount mechanisms, items are not allocated efficiently to buyers. Namely, social surplus is not maximum in existing volume discount schemes. To solve this problem, we propose a volume discount mechanism based on the seller's reservation price and the payment adjustment value. First, a seller registers his/her items with the evaluation value functions. The seller's evaluation value is sealed and each buyer bids his/her evaluation value as sealed bid. After the deadline, the mechanism determines the allocation of bundles of items. A tentative price is decided and the payment adjustment value is calculated. Finally, the payment amount is calculated. Our mechanism has some key advantages. First, the mechanism is Pareto efficient. Second, our mechanism is a strategy-proof mechanism, that is, it has the incentive compatibility. Third, our mechanism provides individual rationality. Fourth, our mechanism is made based on the volume discount system where the seller can give a signal indicating a discount for buyers. Finally, our mechanism weakens the influence of false name bids.

Why the Reserve Price Should Not Be Kept Secret

This paper considers the optimality of setting a secret reserve price in ascending auctions. Contrary to intuition, an ascending auction is no longer equivalent to a second price auction when the reserve price is secret. We determine the seller's optimal reserve price policy when the bidders' values are private and independently distributed and when the bidders are risk averse. We show that an optimal secret reserve price policy can dominate an optimal public reserve price policy when the bidders' degree of constant relative risk aversion is sufficiently high and when the seller can commit to a reserve price policy before learning her type. In contrast, a secret reserve price policy can never be part of a Bayesian equilibrium when the seller is informed.

Estimating House Price Indexes in the Presence of Seller Reservation Prices

We analyze a bias in transaction-based price indexes due to the presence of seller reservation prices. We develop a model in which the ratio of sellers' reservation prices to the market value affects trading volume and biases of observed transaction prices: when trading volume decreases (increases), index returns are estimated with an upward (downward) bias. We propose a new econometric procedure to mitigate the bias, and use simulations to demonstrate the effectiveness of the procedure. We construct a reserve-conditional unbiased index for the Los Angeles housing market, which substantially differs from a traditional repeat sale index.

Estimating House Price Indexes in the Presence of Seller Reservation Prices

We analyze a bias in transaction-based price indexes due to the presence of seller reservation prices. We develop a model in which the ratio of sellers' reservation prices to the market value affects trading volume and biases of observed transaction prices: when trading volume decreases (increases), index returns are estimated with an upward (downward) bias. We propose a new econometric procedure to mitigate the bias, and use simulations to demonstrate the effectiveness of the procedure. We construct a reserve-conditional unbiased index for the Los Angeles housing market, which substantially differs from a traditional repeat sale index.

An optimal standing timber auction?

We focus our study on a lump sum stumpage auction, with bids in total value and secret seller's reserve value. We check that the procedure examined may be ruled by a procedure dealing with total value but in which the seller would disclose his reserve strategic value. Moreover, the procedure with total value and disclosed seller's reserve strategic value may be ruled or not by a procedure on price (not on total value) and public seller's reserve price, in which buyers and seller would use the same real reference of the timber volume of the lot disclosed before the auction.

Multiunit Auctions in Which Almost Every Bid Wins

We consider multiunit auctions in which there are enough units so that each bidder but one wins every unit on which he bids. We characterize the equilibrium bidding strategy for three different payment rules: the pay‐your‐bid auction, the uniform‐price auction in which the price equals the lowest winning bid, and the uniform‐price auction in which the price equals the highest losing bid. We also consider the Vickrey pricing rule. In the case we examine, the auctions are all efficient and thus are revenue equivalent. The equilibria illustrate several phenomona that cannot arise in single‐unit auctions. Even though the auctions are expected‐revenue equivalent, different bidders may end up paying very different amounts. Also, in contrast to single‐unit auctions, changing the seller's reservation price affects revenues, even if it remains below the lowest possible value to bidders.

Overbidding vs Fire-Sales in Bankruptcy Auctions

We analyse bidding incentives of the main creditors (banks) in Swedish bankruptcy auctions. Lacking a direct mechanism for enforcing its seller reservation price, the bank offers financing to a potential bidder in return for a bid strategy that maximizes the expected profits of the bank-bidder coalition. The coalition overbids (in excess of the coalition's private valuation) by an amount that decreases during the bank's ‘liquidation recovery’. This is the recovery amount if the bank were to receive the piecemeal liquidation value announced by the auctioneer at the start of the auction. Since both the liquidation recovery and the final going-concern auction premium are observable, the overbidding theory is testable. We perform a large-sample, cross-sectional analysis where overbidding is pitched against asset fire-sale arguments. The latter hold that auctions tend to produce lower going-concern premiums when taking place during industry-wide financial distress, or when the firm is sold back to old owners or to industry outsiders. The evidence is strongly consistent with overbidding but provides little support for asset fire-sale arguments.

The Effect of Perceived Seller Reservation Prices on Buyers' Bargaining Behavior in a Flexible-Price Market

Previous laboratory experimental studies of bargaining have shown that a bargainer's perception of an opponent's reservation price influences the bargainer's own counteroffer, concession magnitude, and ultimatum offer. However, most of these studies have been conducted in countries where bargaining is not an everyday commercial phenomenon, and so respondents may not be expected to have much prior experience with bargaining. The present study examines these relationships within the context of a field experiment conducted in a country where bargaining is a common mode of establishing prices for a wide range of products in the ordinary course of commercial transactions. A number of hypotheses derived from the previous studies are supported by findings of the present study, thus confirming the external validityofthepreviousfindings.