Increasing Price Transparency: Implications of Consumer Price Posting for Consumers' Haggling Behavior and a Seller's Pricing Strategies

In an attempt to gain a better position in haggling, consumers often seek a seller's pricing information (e.g., whether the posted price is negotiable, the discount and transaction prices) before going to that seller. Although traditionally difficult to obtain, such information is becoming increasingly available due to consumer price posting (CPP), whereby consumers post and share their purchase price information on the Internet. In this analytical study, we consider a market in which a seller, who chooses between a fixed price policy and a haggling policy, serves two types of consumers who differ in their willingness to pay and haggling costs. We explore how CPP can affect consumers' behavior and the seller's pricing strategies (i.e., pricing policy and the associated prices). In the absence of CPP, our model features a two-sided uncertainty: the seller does not know individual consumer's type and thus may find it optimal to use a haggling policy to price discriminate consumers, whereas consumers do not readily observe the seller's cost type and pricing policy, and thus are uncertain whether their haggling will be fruitful. In the presence of CPP, consumers' uncertainty about the seller's pricing policy is resolved. Because CPP can improve price transparency, inhibit consumers' acceptance of a posted price and spur price haggling, it seems apparent that it should benefit consumers and hurt the seller. However, our analysis shows that CPP can lead to fewer purchases, higher prices and even a greater seller profit. It further shows that although CPP surely increases information accessibility, it can also reduce the amount of information available to consumers. These results are in sharp contrast to the conventional wisdom in the literature.     

Name-your-own-price as participative pricing strategy: a review of the literature from 2001–2017

ABSTRACT

Name-your-own-price (NYOP), a pricing strategy often referred to as a reverse auction, is a participative pricing mechanism in which consumers have a relatively high control over the price they pay for a product or service. In an NYOP mechanism, buyers generate the final price of a product or service when they bid above an unrevealed threshold price set by the seller. Although NYOP as a pricing strategy was previously investigated, the literature remains scarce and fragmented. This paper attempts to assemble the relevant findings of this pricing strategy, by systematically reviewing all publications from 2001 to 2017. We explored the impacts of this mechanism for companies and consumers, such as increased profit for companies and higher savings for consumers, reduced competition for companies and increased satisfaction for consumers. We also highlighed the best practices of NYOP, such as the bidding practices, threshold price, and willingness to pay.     

Protocols for automated negotiations with buyer anonymity and seller reputations

In many Internet commerce applications buyers can easily achieve anonymity, limiting what a seller can learn about any buyer individually. However, because sellers need to keep a fixed web address, buyers can probe them repeatedly or pool their information about sellers with the information obtained by other buyers; hence, sellers' strategies become public knowledge. Under assumptions of buyer anonymity, publicly‐known seller strategies, and no negotiation transaction costs for buyers, we find that take‐it‐or‐leave‐it offers will yield at least as much seller profit as any attempt at price discrimination could yield. As we relax those assumptions, however, we find that sellers, and in some cases buyers as well, may benefit from a more general bargaining protocol. This revised version was published online in June 2006 with corrections to the Cover Date.     

The impact of supply disruption risk on a retailer’s pricing and procurement strategies in the presence of a substitute product

Retailers often experience stockouts when a supplier fails to deliver an order. In this paper, we identify the optimal procurement policy of a multi-product retailer in the presence of possible supply disruptions. Our analysis reveals that, in anticipation of potential supply disruptions, a retailer would typically benefit from ordering more units from a reliable supplier and fewer units from an unreliable one. Furthermore, the total number of units ordered may increase when there is supply disruption risk. As a result, the retailer may overstock some items. However, there are situations in which a retailer would optimally respond to supply uncertainty by consolidating its selling strategy around the unreliable supplier’s product. Under such a strategy, we find the surprising result that the retailer reduces the amount it orders from a reliable supplier as an unreliable seller becomes even less reliable. We also explore how supply disruptions can affect a retailer’s optimal pricing strategy. We find that under certain conditions, it is beneficial for a retailer to lower its price of a substitute product when one supplier fails to deliver its product. Finally, we find that, on net, consumers may benefit from supply uncertainty even though supply disruptions eliminate access to a desirable product.     

Online channel strategies under different offline channel power structures

This study explores the manufacturer's marketing and pricing strategies for online channel under different offline channel power structures. Through these strategies, the manufacturer sells products through an offline retailer and an e-tailer. The manufacturer decides the cooperation mode with the e-tailer by the reselling or the agency selling mode and the pricing strategy on the basis of the power structures, i.e., vertical Nash structure (VN), manufacturer Stackelberg structure (MS), and retailer Stackelberg structure (RS). We find the manufacturer selects the online agency selling mode when the commission rate is less than the given threshold. As long as the commission rate is more than another threshold, the manufacturer selects the online reselling mode under the VN structure; however, the manufacturer selects the online agency selling mode under the other two structures. As well, the offline wholesale price is higher under the MS structure than those under the VN and RS structures. When the manufacturer selects the online agency selling mode, the offline retail price is highest under the MS structure, and the online retail price is highest under the VN structure. Meanwhile, consumers can always obtain a higher surplus in the online agency selling mode under all offline power structures.     

Lock in and switch: Asymmetric information and new product diffusion

Many new web-based services are introduced as free services. Depending on the seller??s business model, some remain free in the long run, while others switch to pay mode at some point in time. I characterize the relation between buyers and a new service seller when the former are uncertain about the latter??s business model and need to incur a one-time sunk cost before enjoying the new service. I derive a natural signaling equilibrium where the seller plays a ??lock-in-and-switch?? strategy, while buyers play a ??wait-and-see?? strategy. Specifically, a high-cost seller starts by pricing at zero and waits for a sufficient number of consumers to adopt the new service, at which point the seller switches to pay mode. In this gradual separation equilibrium, the signal is given not by the price level (which always starts at zero) but rather by the duration of the introductory offer. Finally, I show the equilibrium entails diffusion even though consumers are identical and equally aware of the new service??s existence.     

Manufacturer-Optimal Wholesale Pricing When Retailers Compete

The existing marketing science literature on channels of distribution has emphasized pricing strategies that maximize either channel or manufacturer margin. This emphasis has implicitly assumed that optimal wholesale prices are independent of any fixed fees charged by the manufacturer. While this assumption is justified in a single-manufacturer, single-retailer world, it generally does not lead to manufacturer profit maximization in a world of competing retailers. In this paper we derive a manufacturer-optimal wholesale pricing strategy by simultaneously determining both elements of a two-part tariff (consisting of a wholesale price and a fixed fee). We show that the manufacturer will always prefer this sophisticated pricing strategy to one that maximizes either channel or manufacturer margin. We also show that both elements of the optimal tariff are functions of the absolute difference between retailer fixed costs.     

The impact of buyer–seller relationships and reference prices on the effectiveness of the pay what you want pricing mechanism

Pay what you want (PWYW) is a new participative pricing mechanism that delegates the whole price determination to the buyer. Previous research on PWYW suggests that the final prices paid are not only affected by consumer characteristics but also by varying conditions, such as social distance within buyer–seller relationships and the provision of reference prices. Through an online survey and two field experiments, we test varying conditions of PWYW, such as social distance (buyer–seller relationship), provision of external reference price, product value, level of reputation, and duration of an application of PWYW. The results indicate that the provision of an external reference price is advantageous for the seller as the prices paid increase. The seller should also avoid offering products with high product value under PWYW conditions. Furthermore, increasing social distance may decrease the prices paid. Finally, a high level of reputation may be beneficial.     

Return freight strategies and selling formats in e-commerce supply chain: The perspective of consumer fairness concerns and online shopping returns

Returns and consumer fairness concerns put a huge pressure on manufacturers who sell their products online. The optimal selling format and return freight strategy become particularly important for manufacturers in an e-commerce supply chain. Therefore, we build game models for the following scenarios under different selling formats: the seller bearing the return freight costs or the return-freight insurance premiums, consumers buying insurance for themselves, and no one buying insurance. By comparing the optimal solutions of the game models under reselling and agency formats, several conclusions are derived. In the agency format, if the return-freight insurance premium is higher than a particular threshold, then the optimal strategy of the manufacturer is to decrease the selling price to encourage consumers to purchase the insurance, otherwise, the manufacturer should purchase the insurance. As the level of consumer fairness concerns and platform commission rates increase, the manufacturer should gradually move from the agency to reselling format. In the reselling format, if the return-freight insurance premium is lower than a particular threshold, then consumers will purchase insurance and this will make the platform more profitable, and conversely, the platform should bear the return freight costs.     

The Generalized Nash Bargaining Solution for Transfer Price Negotiations Under Incomplete Information

In our model two divisions negotiate over type-dependent contracts to determine an intrafirm transfer price for an intermediate product. Since the upstream division’s (seller’s) costs and downstream division’s (buyer’s) revenues are supposed to be private information, we formally consider cooperative bargaining problems under incomplete information. This means that the two divisions consider allocations of expected utility generated by mechanisms that satisfy (interim) individual rationality, incentive compatibility and/or ex post efficiency. Assuming two possible types for buyer and seller each, we first establish that the bargaining problem is regular, regardless whether or not incentive and/or efficiency constraints are imposed. This allows us to apply the generalized Nash bargaining solution to determine fair transfer payments and transfer quantities. In particular, the generalized Nash bargaining solution tries to balance divisional profits, while incentive constraints are still in place. In that sense a fair profit division is generated. Furthermore, by means of illustrative examples we derive general properties of this solution for the transfer pricing problem and compare the model developed here with the models existing in the literature. We demonstrate that there is a tradeoff between ex post efficiency and fairness.     

Optimal pricing in social networks considering reference price effect

We study the optimal monopoly pricing strategies in a social network, in which consumers experience a network effect that is dependent on their neighbors' consumptions and a reference price which is the average price received by their neighbors. We establish a two-stage game model for any social network. Utilizing the backward induction, we derive the equilibrium price by maximizing the monopolist's profit. In addition, we apply this model to the two most commonly used network structures: the star network and the bipartite network. We find that both the network effect and the reference price effect play a critical role in deciding pricing strategies in social networks. Moreover, our numerical results demonstrate that whether to implement discriminatory pricing depends critically on the network structure. This work provides monopoly firms a useful guideline for optimal pricing decisions in social network marketing.     

Seller honesty and product line pricing

We study upselling in markets where the seller observes consumer need but the consumer herself may not (e.g., medical care, durable repairs, financial and legal services). The seller may recommend excessive product features to uninformed consumers. In a monopoly with two types of consumer (one with a basic need and the other an advanced need) and two types of service (a basic service which fulfills only the basic need and an advanced service which fulfills both needs), we investigate the firm’s honesty and product-line pricing. We reach several results. First, the firm is honest if the basic service is superior (in that it generates higher per-capita social surplus than the advanced service under the efficient allocation) or if the consumers with the basic need are sufficiently many. Second, when there exist informed consumers who neglect seller recommendation, the presence of informed consumers may cause consumer welfare to decrease, and a larger informed population may cause firm profits and social welfare to increase or decrease. Lastly, when the informed consumers boycott a dishonest firm and withhold purchase, firm profits may increase because the threat of boycotting makes the firm more credible and allows a higher price of the advanced service.     

When auction meets fixed price: a theoretical and empirical examination of buy-it-now auctions

Recently fixed pricing and auctions have been brought together in a new pricing format that offers bidders the option of prematurely ending an auction at a fixed price. The growing popularity of auctions presents an interesting pricing decision for managers: whether to sell at a fixed price, in a regular auction, or through a buy-it-now auction. This paper studies eBay’s buy-it-now auction and answers the following research questions: why is fixed price used at traditional auctions, will buy-it-now increase the seller’s profit, how is an optimal price determined, and how is the buy-it-now decision influenced by key factors such as the customer’s cost of participating in the auction, the seller’s reserve price, and the number of potential customers. Our results show that when customers make endogenous participation decisions according to their participation costs, buy-it-now auctions can increase both customers’ utility and sellers’ profit. Endogenous participation has important implications for seller’s pricing decisions such as price formats and levels. Depending on the level of the posted price, the resulting price format could be either fixed price, buy-it-now auction or pure auction. Therefore, the seller needs to be careful and take into account market conditions when posting a price at auctions. We empirically test the model assumptions and predictions using data collected from eBay.

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The effect of privacy choice in cookie notices on consumers' perceived fairness of frequent price changes

Recent regulatory changes (i.e., General Data Protection Regulation of the European Union) enforce that seller (e.g., retail and service) and all other websites disclose through cookie notices which data they collect and store. At the same time, websites must allow consumers to disagree to the tracking of their browsing behavior. Despite sellers' concern about the loss of consumer insights—as consumers might disagree to the collection of their browsing data—cookie notices might also have a surprising side-effect: Consumers might accept frequent price changes (from personalized or dynamic pricing) more readily, if they agree through a cookie notice that their behavior can be tracked. Specifically, two experimental studies show that consent to the tracking of browsing behavior increases consumers internal attribution of a price change, as consumers attribute the cause of the change (here: giving up data) to themselves. This increases price fairness perceptions and, in turn, purchase intent. As a result, for online sellers of goods or services the implementation of cookie notice should no longer be thought as a matter to be avoided, but rather a trade-off decision: Loss of a part of consumer insights versus higher acceptance of data-driven marketing mix decisions, such as frequent price changes.     

The influence of seller strategy on the winning price in online auctions: A moderated mediation model

This paper examines the impact of seller strategy on winning prices in online auctions. In our conceptual model, three strategic choices made by the seller - minimum opening price, auction length, and use of a hidden reserve price - are mediated by the number of bids placed during the auction and moderated by product type. Our tests analyze eBay auction data for four consumer products through two matched studies (two products per study). In particular, we compare products for which value is easily determined with those for which value is less clear. Overall, we find strong evidence of the effects of minimum opening price and hidden reserve prices on final winning prices. The impact of auction length on winning price is less clear. In general, our tests support the idea that potential buyers rely more on signals such as opening price and reserve price for products for which reference prices are less available.     

Why is Price Dispersion Higher Online than Offline? The Impact of Retailer Type and Shopping Risk on Price Dispersion

When physically similar products, of similar quality, are offered by retailers both online and offline, we often observe that the dispersion in prices of these products online is greater than the price dispersion offline. This observation runs counter to early theories that suggested price dispersion online would be smaller than that offline due to the ease of search and information availability online. This paper investigates and provides an explanation for this puzzling phenomenon by examining the impact of two important drivers of price dispersion: retailer type and consumers’ shopping risk. Retailer type refers to whether a retailer is a pure offline, pure online, or dual channel retailer. Shopping risk is defined as the product of consumers’ perceived risk of shopping and the transaction uncertainty related to shopping at different types of retailers.A game-theoretic approach is adopted to model consumers’ price search and product purchase, as well as price competition within and across retailer types in online and offline markets. Equilibrium pricing strategies are derived for different retailer types competing for different consumer segments with different levels of perceived shopping risk. The impact of retailer type and shopping risk on online versus offline price dispersion are quantified, and conditions when price dispersion is greater online than offline are identified.Results indicate that price dispersion is greater online when the number of pure online retailers is sufficiently large and is increasing in the number of pure online retailers. In addition, a reduction in online shopping risk may actually increase online price dispersion. Results further suggest that even without any online sales, dual channel retailers should maintain their online presence for the purpose of information dissemination, which justifies the importance for pure offline retailer to incorporate webrooming strategies, where consumers can search for prices online but purchase offline.     

Shopping with the resale value in mind: A study on second‐hand luxury consumers

The market for second‐hand luxury products is growing and the variety of available sales channels has increased; consumers can buy second‐hand luxury goods not only from brick‐and‐mortar stores but also from a myriad of both global and local online channels. Arguably, the increase in available sales channels has changed consumers’ purchasing behaviour as the roles between sellers and buyers are alternating as one can act as a buyer one day and a seller the next. However, prior research on luxury consumption has mainly focused on brand‐new luxury goods, largely neglecting the consumption of previously‐used luxury products and has not accounted for the multi‐channel shopping environment. The purpose of this paper is to understand how consumers mentally approach the purchase of second‐hand luxury products and what kinds of decision‐making styles they use. The empirical interview data of 22 consumers was analysed by the means of shopping style dimensions that account for both consumer characteristics and external shopping conditions. The interviewees were members of a Facebook buy and sell ‐group focused on luxury products and had recently bought a second‐hand luxury product. All the existing dimensions were evident in the data but an additional dimension was also identified: resale value consciousness. The new dimension emphasizes an investment‐led and price‐quality conscious shopping style but was also found to relate to impulse buying and brand consciousness. The emergence of the dimension is argued to be due to the increase in viable online sales channels for second‐hand luxury products.     

On The Reference Point Effect of Reserve and Buy It Now Prices

In recent years, a trend in retail pricing has been to give consumers greater autonomy in setting their own prices, be it through auctions or other forms of participative pricing. Such consumer pricing autonomy often requires the seller to set limits in the form of price floors and price ceilings. Price floors and ceilings in our auction settings are referred to as reserve prices (RP) and Buy It Now (BIN) prices, respectively. We examine the effect of RP and BIN presence and magnitude on the number of bidders and ending price. Using auctions, we uncover consumers’ willingness to pay (WTP) through bids. WTP is malleable through reference cues. Our focus is on two such cues: BINs and RPs. Results of two field studies, augmented with a laboratory study, show that both BINs and RPs result in lower bidder entry, but have an overall positive effect on ending price. Furthermore, results show that RP is more effective than a comparable BIN magnitude and that these two pricing cues are substitutes. The study design allows the authors to rule out alternative explanations. Open RP and BIN's effect on ending price is due to a reference point effect rather than a price truncation effect. Thus, retailers can increase WTP through changing these reference cues and exploit a richer choice set over which to shape a malleable WTP. The quantification of the interaction between RP and BIN gives managers the ability to jointly take advantage of both RP and BIN.     

Revisiting the showrooming effect on online and offline retailers: The strategic role of in-store service

This study revisits the showrooming effect on online and offline retailers and is the first to examine the strategic role of in-store service in this regard. Considering the effect of in-store service in attracting consumers to offline channels and the showrooming effect of persuading offline consumers to purchase online, we propose a model consisting of two firms, a brick-and-mortar (BM) store and an e-tailer that can invest the staff or facilities necessary to deliver in-store services to consumers. Based on the service decisions, the two firms make their pricing decisions. We compare the optimal decisions of retailers in the cases without and with showrooming to explore the interaction between in-store service and showrooming. Our findings indicate that when a customer bears a high travel cost to visit the BM store, the store should lower the price, and improving the in-store service is ineffective in countering the consumer's showrooming behavior. Moreover, the service level in the case with showrooming can be either higher or lower than in the case without, and the outcome mainly depends on the efficiency of the service investment. Interestingly, in-store services can lead to a win–win situation for both online and offline retailers with showrooming. This study can also be extended to the case of powerful e-tailers or competing BM stores.     

Pricing of mall services in the presence of sales leakage

For a shopping mall, sales leakage occurs when consumer purchases facilitated by the mall are finalized outside it. These sales include, for example, catalog orders filled at the leased premises in a physical mall; For an Internet mall, they include the ones consumers make on an on-line store’s website after learning about the store from an Internet mall website. While these sales are difficult to track in the physical mall, Internet malls like Yahoo can track them by placing cookies on consumers when they visit the mall. The challenge for a mall owner then is to design an appropriate pricing model which takes sales leakage into account. In fact, Yahoo currently uses an All-Revenue-Share Fee with Yahoo collecting from on-line stores a share of all sales revenue, regardless of whether the purchase was made through the mall or directly from the store’s own URL. We explore this new All-Revenue-Share Fee model, compare it with the commonly used Fixed Fee model and the two-part tariff model, and identify the model with the highest profits for the mall under different conditions. We suggest that although an All-Revenue-Share Fee is appealing for Internet malls due to its ability to capture sales leakage directly, it may cause the stores to refrain from joining the mall in certain circumstances. Thus, in certain situations charging a fixed monthly fee can actually be more profitable for the mall versus the All-Revenue-Share Fee model. We also examine how mall and product category characteristics as well as market expansion affect the optimal pricing strategy. We show that a mall should price discriminate across product categories, not just by charging different amounts of fees, but by using different pricing models. Our research provides many managerial implications on how to price over time.