Propose-Your-Price: Effects of Price-Elicitation Format on Bidding Behavior in Reverse Pricing Markets


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Abstract

Reverse pricing is a market mechanism under which a prospective buyer submits a bid for a specific product, and a sale occurs if this bid exceeds a threshold price that has been set in advance by the seller and is unknown to consumers. (Priceline.com is a real-world example of such a mechanism.) One important design variable in connection with reverse pricing is the format used to elicit consumers' proposed prices. In particular, prospective buyers can be given the opportunity to either (1) express the amount they wish to bid in an unconstrained format ("name-your-price") or (2) select one of a number of candidate bid amounts from a list that is provided by the seller ("select-your-price").

 

We argue that bidding behavior in reverse pricing markets is not invariant to the way in which bids are elicited. In particular, we propose that the format of price elicitation tends to influence the magnitude of consumers' bids in a systematic fashion. We predict that, compared to name-your-price, the presence of a list of candidate bid values under select-your-price reduces consumers' perceived uncertainty about the sellers' threshold price and that this, in turn, tends to result in higher bids. Moreover, for the select-your-price format, we hypothesize that the particular range of candidate bids included in the list has a positive influence on consumers' willingness to pay. We find strong support for these hypotheses in two studies - a laboratory experiment using induced product valuations and a field experiment involving actual purchases.