Hila Etzion

Analyzing the Simultaneous Use of Auctions and Posted Prices for Online Selling

Many firms in the business-to-consumer market sell identical products online using auctions and posted prices at the same time. In this paper, we develop and analyze a model of the key trade-offs sellers face in such a dual-channel setting built around the optimal choice of three design parameters: the posted price, the auction lot size, and the auction duration. Our results show how a monopolist seller can increase his revenues by offering auctions and a fixed price concurrently, and we identify when either a posted price only or a dual-channel strategy is optimal for the seller. We model consumer choice of channels, and thus market segmentation, and find a unique (symmetric) auction-participation equilibrium exists in which consumers who value the item for more than its posted price use a threshold policy to choose between the two channels. The threshold defines an upper bound on the remaining time of the auction. We explain how optimizing the design parameters enables the seller to segment the market so that the two channels reinforce each other and cannibalization is mitigated. Our findings also demonstrate that there are two dominant auction design strategies in this setting: one-unit auctions that tend to be short and long multiunit auctions. The optimal strategy for the seller depends on the consumer arrival rate and the disutility of delivery delay incurred by high-valuation consumers. In either case, the optimal design of the dual channel can significantly outperform a single posted-price channel. We show even greater benefits over a naive approach to managing the two channels that optimizes each independently. Our results suggest that unless firms jointly manage these online channels, they may find that adding auctions actually reduces their revenues.

Research Note---Analyzing Pricing Strategies for Online Services with Network Effects

In this study, we model firms that sell a product and a complementary online service, where only the latter displays positive network effects. That is, the value each consumer derives from the service increases with the total number of consumers that subscribe to the service. In addition, the service is valuable only to consumers who buy the product. We consider two pricing strategies: (1) bundle pricing, in which the firm charges a single price for the product and the service, and (2) separate pricing, in which the firm sets the prices of the product and the service separately, and consumers self-select whether to buy both or only the product. We show that in contrast to the common result in the bundling literature, often the monopolist chooses not to offer the bundle (he either sells the service separately or not at all) although bundling would increase both consumer surplus and social welfare. Thus, underprovision of the service can be the market outcome. We also demonstrate that network effects may cause the underprovision of the service.

Managing online sales with posted price and open-bid auctions

We study the profitability of selling consumer goods online using posted price and open ascending-bid uniform-price auction simultaneously. We develop a model of consumer behavior when faced with the choice between the two channels. The model is simulated in order to identify the best designs of the dual channel regime and compare its performance with that of the only posted price regime. We find that the best designs of dual channels with open-bid auctions differ from those of dual channels with sealed-bid auctions previously studied. In addition, when optimally designed, the dual channel regime outperforms the posted price regime.