Experimenting with purchase history based price discrimination

Many purchases of differentiated goods are repeated, giving sellers the opportunity to engage in price discrimination based upon the shopper's previous behavior by either offering loyalty discounts to repeat buyers or introductory rates to new customers. Recent theoretical work suggests that loyalty discounts can be profitable to sellers when customer preferences are not stationary and sellers can pre-commit to prices for repeat buyers, but otherwise returning customers can be expected to pay the same or more than new buyers. This paper reports behavior in controlled laboratory experiments designed to empirically test the impact of these factors on pricing strategies. The results generally support the comparative static predictions of the theoretical model. When customer preferences are fixed over time, sellers attempt to lure customers from their rival. Price pre-commitment for repeat shoppers when buyer preferences vary over time resulted in modest loyalty pricing, but the discounts are not as prevalent as predicted as sellers rarely price below cost. Behaviorally, price pre-commitment to loyal customers is found to reduce prices overall.     

Competition and the signaling role of prices

In a market where sellers are heterogeneous with respect to the quality of their good and are more informed than buyers, high quality sellers' chances to trade might depend on their ability to inform buyers about the quality of the goods they offer. We study how the strength of competition among sellers affects the ability of sellers of high quality goods to achieve communication by means of appropriate pricing decisions in the context of a market populated by a large number of strategic price-setting sellers and a large number of buyers. When competition among sellers is weak high quality sellers are able to use prices as a signaling device and this enables them to trade. By contrast, strong competition among sellers inhibits the role of prices as signals of high quality, and high quality sellers are driven out of the market.     

Collusion through Coordination of Announcements

A theory is developed to explain how sellers can effectively collude by coordinating on list prices (or surcharges), while leaving sellers to set their final prices. List prices are interpreted to be cheap talk announcements about cost information unknown to buyers. Buyers use those announcements to decide whom to invite to their procurement auction and the reserve price to set. By coordinating on a high list price to signal high cost, sellers produce supracompetitive prices by inducing buyers to be less aggressive, as reflected in a higher reserve price. We show that collusion can raise social welfare.     

Buyer confusion and market prices

We employ a price setting duopoly experiment to examine whether buyer confusion increases market prices. Each seller offers a good to buyers who have homogeneous preferences. Sellers decide on the number of attributes of their good and set prices. The number of attributes bears no cost to the sellers and does not affect the value of the good to the buyers but adds complexity to buyers’ evaluation of the goods. The experimental results indicate that the buyers make more suboptimal choices and that prices are higher when the number of attributes of the goods is higher. Moreover, prices and profits are higher than those in a benchmark treatment with perfectly rational (robot) buyers.     

Mechanism choice and the buy-it-now auction: A structural model of competing buyers and sellers

A striking feature of many online sales platforms is the coexistence of multiple sales mechanisms. Items on eBay, for instance, are frequently offered through auctions, posted prices, and buy-it-now auctions. In this article, I study how this mechanism multiplicity influences the welfare of buyers and sellers. I specify and estimate a structural model of mechanism choice in online markets, in which I consider both sides of the market: On the demand side, buyers' choices among available listings are equilibrium outcomes of an entry game. On the supply side, sellers make equilibrium decisions when choosing sales mechanisms and prices. I estimate this model using data from sales of baseball tickets on eBay and calculate consumer and seller rents in three markets: the actual market with all three sales mechanisms and two counterfactual markets with auctions and fixed prices or only fixed-price listings, respectively. I find that the addition of auctions to fixed-price markets hurts sellers and risk-averse buyers but benefits risk-neutral buyers. Additionally, the consumer surplus increases when buy-it-now auctions are offered but the seller surplus is reduced further. I discuss the intuition for the cause of this result.     

Group identity in markets

We present a laboratory experiment that measures the effects of group identity—one's perceived membership in social groups—on market transactions in an oligopoly market with a few sellers and buyers. We artificially induce group identity using art preferences and college majors in different treatments, respectively. Subjects are randomly assigned into the roles of buyers and sellers and interact repeatedly. We find that the presence of groups influences both the selection of trading partners and the determination of prices. All else equal, sellers are more likely to make offers to ingroup buyers, and the buyers are more likely to accept offers from ingroup sellers. There are considerable intergroup price differentials with the outgroup sellers charging a lower price than the ingroup sellers.     

Hot and Cold Markets

This article considers why housing market conditions, including the ratio of buyers to sellers, expected time-to-sale and transaction prices are sensitive to fundamentals. These high sensitivities result from feedback: market participants optimally respond to shocks in a manner that amplifies a shock's initial impact, which in turn elicits further reinforcing responses. For example, a positive demand shock brings more buyers into a market. This improves the bargaining position of sellers, who then sell more quickly, decreasing the stock of sellers in the market. This further increases the relative number of buyers to sellers, amplifying the initial shock.     

Ethnicity in housing markets: Buyers,sellers and agents

This paper examines how ethnicity related to cultural differences arising from ethnic background affects housing market transactions in the Atlanta metro area. Using both the US Census and Wikipedia approaches to infer ethnicity from individuals' names, we find that the interplay of buyer, seller, and agent ethnicity composition affects interaction in the housing market. Sellers working with listing agents in the same ethnic group set higher listing prices and enjoy higher selling prices and quicker sales. Agents working with same ethnicity buyers yield higher prices and liquidity. Even though sellers only communicate with buyers through their agents, houses sold by sellers to buyers of same ethnicity have higher prices and sell faster. And while the ethnic mix of agents and their clients matter, the ethnic mix of agents in the transaction does not.     

Price discrimination by language: Field experimental evidence from a shopping mall

To investigate whether foreign shoppers are discriminated against, we conduct a field experiment at a large shopping mall. We employ 56 female foreigners speaking 11 different languages and 7 Korean natives and collect data on total 2267 store visits. To test price discrimination based on differential search costs, we randomly select buyers to send a signal of lower search cost. Results show that negotiation and signaling induce sellers to lower their price offers. Our experimental findings, combined with auxiliary survey data from foreign visitors, suggest that sellers use the language of buyers as a proxy for the distribution of reservation values.     

Platform competition with free entry of sellers

We study platforms setting access prices and commissions on revenues of sellers engaged in monopolistic competition with free entry, such as the app providers on the app stores of Apple and Android devices. The link between prices on different sides induces the platforms to redistribute all the commission revenues through lower access prices and to set the optimal commission rates from the point of view of consumers, taking into account the pass-through on the prices of sellers, the elasticities of demand and surplus for their services and the elasticity of entry with respect to profitability. We discuss the role of heterogeneous sellers, substitutability between sellers’s products and limitations of the basic alignment of interest due to direct channels for sellers and consumer myopia.     

Search algorithm,repetitive information,and sales on online platforms

A prominent feature of online sales is that buyers rely on the search tools offered by platforms to process information when searching for products. We develop a model that captures how the search algorithm affects buyers’ search processes, which further influences market equilibrium and welfare. If a platform adopts a highly unequal search algorithm, buyers are likely to obtain repetitive information about a small group of sellers, which causes buyers to consider fewer options and suppresses competition. By using data from food delivery platforms, we provide empirical evidence that markets with less equal distributions of store rankings in search results have higher average prices and more concentrated sales. We suggest that regulators should restrict search algorithms from showing repetitive information.     

INFORMATION REVELATION AND BUYER PROFITS IN REPEATED PROCUREMENT COMPETITION*

I investigate how procurement costs are affected by the information that buyers reveal about sellers' behavior, in a setting with two sequentially offered contracts for which a seller's privately known costs are identical. Expected prices are lowest when sellers learn nothing until all contracts are allocated, are higher when they learn all sellers' price offers as contracts are allocated, and typically are even higher when they learn only the winner's identity, or the winner's identity and price offer. The results suggest that buyers engaged in repeated procurement may pay less by revealing minimal or extensive information, rather than an intermediate amount.     

The Gains from Corporate Selloffs: The Case of Real Estate Assets

Recent financial economics literature has hypothesized that variations in market structure influence the distribution of gains from corporate restructuring between buyers and sellers. We test this hypothesis using data on restructuring involving real estate assets by isolating the effects depending on multiple versus single bidders, acquisition frequency and transaction type. While we find gains for both buyers and sellers, the buyers gain only when they make few purchases. Those firms pursuing an acquisition strategy show no gains around the specific acquisition announcements. Additionally, both buyers and sellers are more likely to have a positive reaction to the announcement when the transaction is property rather than a division or subsidiary.     

An Experimental Analysis of the Impact of Intermediaries on the Outcome of Bargaining Games

We conduct an experimental analysis of the bargaining between a buyer and a seller of the exchange of a single good by means of an intermediary or broker. We examine how an intermediary affects the price, the likelihood of a successful negotiation, and the time it takes to complete a negotiation. We first examine the impact of the intermediary as a pure middleman, and then as an information source about the distribution of seller and buyer reservation prices. The results show that an intermediary, whether or not informed, increases the sale price, reduces the likelihood of an agreement, and increases the time to reach an agreement (though the number of bargaining rounds declines). The results suggest that the benefits of brokerage may be predominantly in the matching of buyers and sellers rather than in facilitating bargaining.     

Platform Price Parity Clauses and Consumer Obfuscation*

Several antitrust authorities have investigated platform price parity clauses around the world. I analyze the impact of these clauses when platforms design a search environment for sellers and buyers to interact. In a model where platforms choose the unit search cost faced by consumers, I show when platforms can profitably obfuscate consumers through high search costs. Then, I show that price parity clauses, when exogenously given, can increase or reduce obfuscation, prices, and consumer surplus. Finally, when price parity clauses are endogenous, they are only observed in equilibrium if they hurt consumers.     

Real Estate Brokers and the Market for Residential Housing

This study explores the role of the real estate broker in the housing market. A model of the demand for broker services by both sellers and buyers is developed and conditional logit estimates are presented. Evidence relating to the effects of the brokerage industry on housing market transactions also is presented. Brokers do not seem to affect the prices of the houses they sell. But they do influence the level of housing consumption by buyers.     

FHA Mortgage Discount Points, House Prices and Consumer Behavior

The allocation of FHA discount points between buyers and sellers has recently been the subject of empirical investigation. The research reported here examines this relationship in more detail. Regression equations were estimated for separate price categories of housing using dummy variables for the number of discount points being charged. Separate equations were also estimated for periods when points were rising and when they were falling. The results essentially are that sellers attempt to shift all of the discount points to buyers and frequently are successful. However, in certain situations the points are shared between buyers and seller.     

Auctioning Horizontally Differentiated Items

This paper analyzes competition between two sellers that offer horizontally differentiated items at competing auctions. Three possible outcomes can arise in equilibrium. For substantially differentiated items the monopoly reserve prices form an equilibrium, and the market is not entirely covered. When products become closer substitutes, a non-empty interval of types becomes valuable to both sellers. When transport costs are low, and virtual valuations are high, sellers compete for these bidders and set their reserve prices below the valuation of the marginal bidder. In equilibrium all types enjoy participation rents. For intermediate levels of transport costs it is not worth competing for runaway bidders. In this case, there is a continuum of equilibria. In each equilibrium sellers adjust their reserve prices so that the marginal bidder gets no rents.     

Optimal Selling Mechanism,Auction Discounts and Time on Market

This article examines the optimal selling mechanism problem in real estate market using mean‐variance analysis and downside risk analysis. When sellers can choose between accepting the first offer above a reservation price or auctions (waiting an optimal and fixed time), sellers having higher risk aversion choose auctions and wait a fixed time while sellers having lower risk aversion choose an optimal reservation price and wait a random time. Positive auction discounts are compensated by reduced risks, and there exists a connection between liquidity risk and conditional auction discount. More (Fewer) sellers will choose to sell their houses through auctions in a hot (cold) market or when holding cost increases (decreases). When sellers choose auctions, sellers having higher risk aversion who have lower holding cost wait longer and obtain higher sale price. Loss‐averse sellers unanimously choose the mechanism of setting an optimal reservation price.     

Competing through information provision

This paper studies the symmetric equilibria of a two-buyer, two-seller model of directed search in which sellers commit to information provision. More informed buyers have better differentiated private valuations and extract higher rents from trade. When sellers cannot commit to sale mechanisms, information provision is higher under competition than under monopoly. In contrast, when sellers commit to both information provision and sale mechanisms, I identify simple conditions under which sellers post auctions and provide full information in every equilibrium, ensuring that all equilibrium outcomes are constrained efficient. Sellers capture the efficiency gains from increased information and compete only over non-distortionary rents offered to buyers.