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.     

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.     

USING RESERVE PRICES TO DETER COLLUSION IN PROCUREMENT COMPETITION*

To enhance our understanding of collusion in procurement settings, this paper quantitatively evaluates how the buyer's choice of a reserve price influences the sustainability of two previously devised collusive schemes. If the buyer does not select its reserve price strategically, then collusion may be sustainable for a wide range of plausible discount factors. However, even mildly sophisticated reserve price selection can dramatically shrink the set of discount factors for which collusion is sustainable. These findings support existing arguments that buyers are vulnerable to collusion, but they also suggest that buyers possess tools that may profitably induce sellers to act competitively.     

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.     

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.     

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.     

Secret reserve prices in first-price auctions

This article offers a theoretical explanation for the use of secret reserve prices in auctions. I study first-price auctions with and without secret reserve price in an independent private values environment with risk-neutral buyers and a seller who cares at least minimally about risk. The seller can fix the auction rules either before or after she learns her reservation value. Fixing the rules early and keeping the right to set a secret reserve price can be strictly optimal. Moreover, I describe the relation of using a secret reserve price to phantom bidding and non-commitment to sell.     

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.     

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.     

On the incidence of commissions in auction markets

We analyze the welfare consequences of an increase in the commissions charged by intermediaries in auction markets. Commissions are similar to taxes imposed on buyers and sellers, and standard economics suggests that both sellers and buyers are made worse off by the tax. However, we show that when the buyers' participation constraint binds and when sellers set optimal reservation prices, the level of commissions correlates to participation and reservation prices in such a way that participating buyers strictly gain from higher commissions.     

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.     

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.     

Market Mechanism Choice and Real Estate Disposition: Search Versus Auction

We propose a model of mechanism choice in the disposition of real estate assets where we consider two alternatives: a search market and an auction. Within the search framework, we derive an equilibrium whereby buyers incur search costs and sellers incur holding costs for the period during which the property is not sold. In the auction alternative, the seller joins an existing pool of sellers in undertaking a multiple–object auction and pays a commission upon sale. Buyers and sellers freely choose their mechanisms, which in equilibrium are optimal given each group's conjectures about the mechanism choice of their counterpart. In equilibrium, an agent cannot benefit from deviating from his choice and each agent's beliefs are consistent with the equilibrium outcome. It is shown that (a) buyers with high search costs will choose auctions because the auction payoff imposes an upper bound on buyers' gains from search, and (b) prices at auctions will be higher. Using vacant lot sales data and a method–of–moment estimator which accounts for the presence of an endogenous discrete mechanism choice variable, we estimated a hedonic regression to detect the price effect. It was determined that, on average, lots sold for $1.44 per square foot more in auctions than in the search market, as predicted by our model.     

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.     

The Gender Gap in Real Estate Sales: Negotiation Skill or Agent Selection?

This study examines differences in net selling price for residential real estate across male and female agents. A sample of 2,020 home sales transactions from Fulton County, Georgia, are analyzed in a two‐stage least squares, geospatial autoregressive corrected, semi‐log hedonic model to test for gender and gender selection effects. Although agent gender seems to play a role in naïve models, its role becomes inconclusive as variables controlling for possible price and time on market expectations of the buyers and sellers are introduced to the models. Clear differences in real estate sales prices, time on market and agent incomes across genders are unlikely due to differences in negotiation performance between genders or the mix of genders in a two‐agent negotiation. The evidence suggests an interesting alternative to agent performance: that buyers and sellers with different reservation price and time on market expectations, such as those selling foreclosure homes, tend to select agents along gender lines.     

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.     

Optimal reserve prices in sealed-bid auctions with reference effects

The reference effect and loss aversion are incorporated into the buyer’s utility in the symmetric independent private value models of sealed-bid auctions. The buyer’s equilibrium bidding strategy and the seller’s optimal reserve price are derived for the first-price and second-price sealed-bid auctions. In both auction mechanisms, the seller’s optimal reserve price and expected revenue are increasing in the reference point. We compare the seller’s expected revenues as well as the optimal reserve prices in the two auctions. The results show that the seller will set a higher optimal reserve price but obtain lower optimal expected revenue in the second-price auction compared to the first-price auction. Further, we extend the model to the gain-seeking case, and endogenize the reference point as the ex-ante expected price of the item in equilibrium. In contrast to the loss-averse case, the seller will set a lower optimal reserve price but obtain higher optimal expected revenue in the second-price auction compared to the first-price auction if the buyers are gain-seeking. With an endogenous reference point, similar results are obtained in terms of revenue comparison between the two auctions.     

Countervailing Power and Chain Stores

The countervailing power of large buyers subdues the market power of sellers, but price concessions won by large buyers in upstream markets may or may not translate into lower prices downstream as Galbraith (American capitalism: The concept of countervailing power. Houghton Mifflin, Boston, 1952, Am Econ Rev 44:1–6, 1954) once contended. This paper presents a model that formalizes certain previously neglected elements of Galbraith’s argument, and shows that upstream price concessions may lead to lower downstream prices. In this model, a large retail chain store with countervailing power plays one large supplier off against another to win lower prices. An indirect effect of these interactions is that small retailers also pay lower prices, although not as low as the chain. Finally, competition among the retailers drives retail prices lower. The retail-price-restraining effect of the chain is stronger than the effect that is produced by the entry of an additional supplier.     

Empirical Evidence on the Impact of Reserve Prices in English Auctions

We study the impact of reserve prices on the revenue of English auctions using a unique hand‐collected database of virtual football players from the online football management game Hattrick. As theoretically predicted, setting a reserve price entails a trade‐off between the cost of setting it too high and having the good go unsold, and the benefit associated with a higher revenue should the reserve price successfully extract surplus from the highest bidder. Overall, we find the net benefit of setting a higher reserve price to be negative, regardless of the value of the reserve price. This is a novel result insofar as previous literature has generally found an insignificant or positive effect of the reserve price on unconditional auction revenue.