Participative Pricing Mechanisms

Question 1

Name Your Own Price (Reverse Pricing) - characteristics

Answer 1

a. Reverse pricing: buyer makes a bid – purchase if bid > seller‘s threshold
b. Opaque good

Question 2

Example: Priceline

Answer 2

a. Booking platform for flights, hotels, vacation packages, …
b. Consumer specifies date and destination and makes a bid, no immediate second bid possible
c. Founded in 1998, gone public in 1999
d. Stock price: $ 162.37 in 1999, $ 1.12 on December 26, 2000, $ 1,559.44 on March 26, 2019 (Booking Holdings)

Question 3

Price discrimination

Answer 3

Priceline attracts consumers with low WTP and low transaction costs (willing to take the inconvenience)

Question 4

Where in the process should the seller generate revenue?

Answer 4

a. Bidding fee
b. No markup above marginal cost
c. Intuition:
i. Allow more trades to occur at lower thresholds
ii. Bidding fee easier to implement

Question 5

Should the seller help or hinder consumer learning about the bid-acceptance threshold?

Answer 5

a. Facilitate consumer learning if bidding fee & outside price is rather high
b. Intuition:
i. Consumer learning not good if seller wants an information rent
ii. But: Consumer learning increases participation by high-value buyers

Question 6

Are Bids Rational? – Economic Model

Answer 6

1. Question: How should bidders proceed?
2. Assumptions:
   a. Multiple bids possible
   b. Buyers want to maximize consumer surplus
   c. Making a bid is costly
3. Optimal bid pattern:
   a. Begin with lowest price that does not seem completely unreasonable
   b. Increase bids up to reservation price
   c. Increase bids in decreasing size of increments
4. Question: How do buyers proceed?
5. Empirical model of bidding behavior –> six patterns

Question 7

Pay What You Want - Advantages for Seller

Answer 7

a. Consumers may be willing to pay (more) because of…
i. Less adversity –> from money-market to social-market relationship
ii. Novelty
iii. Level of control offered
b. Saves effort of determining optimal price
c. Price discrimination
d. Generates attention
e. Cross-selling
f. Eliminates channel intermediaries

Question 8

Success Factors of PWYW

Answer 8

a. Product with low marginal cost
b. Fair-minded customers
c. Heterogeneity in willingness-to-pay
d. Strong relationship between buyer and seller
e. Competitive marketplace

Question 9

Auctions (Keyword Advertising)

Answer 9

1. Definition: form of targeted online advertising in which the placement of advertisements is triggered by keywords
2. Forms:
   a. Sponsored links
   b. Contextual advertising
3. Market for keyword advertising dominated by Google (advertising revenues of 135 billion $ in 2019)

Question 10

Pricing for Keyword Advertising

Answer 10

1. Pay per click
2. Real-time auctions to determine advertiser’s position:
   a. Advertisers submit a bid for each keyword (price per click)
   b. Bids can be changed frequently
3. Google AdWords:
   a. Ad rank depends on
   i. Bid
   ii. Ad quality (expected click through rate, landing page quality, ad relevance)
   iii. Ad format impact
4. Paid price = minimum necessary to keep position

Question 11

Types of Keyword Auctions

Answer 11

1. Generalized first price-auction (GFP)
2. Generalized second-price auction (GSP) / Vickrey-Clarke-Grove mechanism (VCG)
3. Weighted Unit-Price Auction (WUPA) (Google)

Question 12

Generalized first price-auction (GFP)

Answer 12

a. Highest bid gets most prominent position
b. Advertisers pay price they most recently bid
c. Problem: cyclic bidding

Question 13

Generalized second-price auction (GSP) / Vickrey-Clarke-Grove mechanism (VCG)

Answer 13

a. Highest bid becomes most prominent position
b. Price not directly affected by bid:
i. GSP: Advertiser in position i pays price equal to bid of an advertiser in position (i + 1) plus a minimum increment (typically $0.01)
ii. VCG: Advertiser‘s payment is equal to the opportunity cost the advertiser introduces to other players
c. Problem: bad quality ads make search engine less attractive for users