Vincent Mak

Purchasing Scarce Products Under Dynamic Pricing: An Experimental Investigation

Whereas theoretical studies on dynamic pricing typically assume that consumers are either fully strategic or fully myopic, systematic empirical investigations into how consumers behave under dynamic pricing contexts are relatively rare. Focusing on scarce products, we constructed and experimentally tested a two-stage model in which a firm sells a seasonal good under exogenous inventory constraints to a market of strategic buyers. In our experiment, subjects assigned the role of buyers made purchase decisions in response to prices set by an automated seller. We find that equilibrium predictions assuming fully strategic buyers largely accounted for aggregate behavior in the experiment, and the ex post optimal decisions for subjects were overwhelmingly consistent with equilibrium prescriptions. Moreover, subjects tended to become individually more strategic as the session progressed. However, there were also nuanced systematic patterns of deviations from equilibrium that had profit and pricing implications f...

Competitive dynamic pricing with alternating offers: Theory and experiment

We propose an equilibrium model of duopolistic dynamic pricing in which a buyer alternates between two sellers for price offers over a finite time horizon. The game ends when the buyer accepts a price offer or the selling season is over, whichever comes first. Previous research (Granot et al., 2007) shows that there are successive markdowns in equilibrium when the buyer is commonly known to be myopic; our analysis suggests that when she is known to be strategic price offers over the entire selling season are constant. Moreover, lengthening the season increases (generally decreases) both sellersʼ profits when the buyer is myopic (strategic). An experimental study largely supports the equilibrium predictions when the buyer is myopic but not when she is strategic. In the latter case, early in the season sellers overprice the good arguably in an attempt to effectively shorten the season and thereby increase their profits.

Resource Allocation Decisions Under Imperfect Evaluation and Organizational Dynamics

Research and development R&D projects face significant organizational challenges, especially when the different units who run these projects compete among each other for resources. In such cases, information sharing among the different units is critical, but it cannot be taken for granted. Instead, individual units need to be incentivized to not only exert effort in evaluating their projects, but also to truthfully reveal their findings. The former requires an emphasis on individual performance, whereas the latter relies on the existence of a common goal across the organization. Motivated by this commonly observed tension, we address the following question: How should a firm balance individual and shared incentives, so that vital information is both acquired, and equally importantly, disseminated to the entire organization? Our model captures two key characteristics of R&D experimentation: information is imperfect and it is also costly. Our analysis yields several important implications for the design of such incentive schemes and the management of R&D portfolios. This paper was accepted by David Hsu, entrepreneurship and innovation.

'Confidentially Yours': Restricting Information Flow between Trustees Enhances Trust-Dependent Transactions

By extending the traditional trust game to settings involving more than one trustee, we study how restricting information flow between trustees influences trust and reciprocity. We start with a theoretical investigation and then report the results of two experiments designed to examine investor strategy and trustee behavior. Our results suggest that, compared to when information flow is unrestricted, restricting information flow between trustees leads to the following: (a) total investment is larger, (b) the number of trustees receiving positive investment is about the same, and (c) the investor sends out a larger variety of invested amounts to different trustees.

Dynamic Pricing Decisions and Seller-Buyer Interactions under Capacity Constraints

Focusing on sellers’ pricing decisions and the ensuing seller-buyer interactions, we report an experiment on dynamic pricing with scarcity in the form of capacity constraints. Rational expectations equilibrium solutions are constructed and then tested experimentally with subjects assigned the roles of sellers and buyers. We investigate behavior in two between-subject conditions with high and moderate levels of capacity. Our laboratory market exhibits strategic sophistication: the price offers of sellers and the buyers’ aggregate responses largely approximate equilibrium predictions. We also observe systematic deviations from equilibrium benchmarks on both sides of the market. Specifically, in our experiment the sellers are boundedly strategic: their prices often exhibit strategic adjustments to profit from buyers with limited strategic sophistication, but they are also often biased towards equilibrium pricing even when that would not be ex-post optimal.

The influence of a competition on noncompetitors

Significance Competitions are prevalent in social life, but it is typical in a competition that the competitors are far outnumbered by people who do not participate in it but are aware of it. In a series of experimental studies, we find that the mere awareness of a competition can affect a noncompetitor’s performance in similar tasks. In our field experiment involving pay-what-you-want entrance at a German zoo, customers who were aware of a competition over entrance payments, but did not participate in it, paid more than customers who were unaware of it. Further experiments provide confirmatory evidence for this contagion effect, and suggest that it is due to noncompetitors becoming motivated to act more competitively upon being aware of the competition. We report a series of experimental studies that investigate the influence of a competition on noncompetitors who do not participate in it but are aware of it. Our work is highly relevant across many domains of social life where competitions are prevalent, as it is typical in a competition that the competitors are far outnumbered by these noncompetitors. In our field experiment involving pay-what-you-want entrance at a German zoo (n = 22,886), customers who were aware of a competition over entrance payments, but did not participate in it, paid more than customers who were unaware of the competition. Further experiments provide confirmatory and process evidence for this contagion effect, showing that it is driven by heightened social comparison motivation due to mere awareness of the competition. Moreover, we find evidence that the reward level for the competitors could moderate the contagion effect on the noncompetitors. Even if an individual does not participate in a competition, their behavior can still be influenced by it, and this influence can change with the characteristics of the competition in an intriguing way.

Beyond Posted Prices: The Past, Present, and Future of Participative Pricing Mechanisms

Driven by the low transaction costs and interactive nature of the internet, customer participation in the price-setting process has increased. Today, platforms such as eBay have popularized online auctions on a global scale, Priceline has made headlines with its name-your-own-price (NYOP) business model, and Humble Bundle has enabled independent musicians and game developers to market their works through pay-what-you-want (PWYW) pricing. Advertising exchanges conduct several hundred million individual auctions per day to sell online advertising slots. The present paper contributes to the literature on participative pricing in three ways. First, we propose a definition of participative pricing mechanisms, as well as a useful taxonomy. Second, we discuss the current understanding by synthesizing conceptual and empirical academic literature. Third, we outline promising research questions with a key focus on the related behavioral aspects of buyers and sellers.

Culture Moderates Biases in Search Decisions

Prior studies suggest that people often search insufficiently in sequential-search tasks compared with the predictions of benchmark optimal strategies that maximize expected payoff. However, those studies were mostly conducted in individualist Western cultures; Easterners from collectivist cultures, with their higher susceptibility to escalation of commitment induced by sunk search costs, could exhibit a reversal of this undersearch bias by searching more than optimally, but only when search costs are high. We tested our theory in four experiments. In our pilot experiment, participants generally undersearched when search cost was low, but only Eastern participants oversearched when search cost was high. In Experiments 1 and 2, we obtained evidence for our hypothesized effects via a cultural-priming manipulation on bicultural participants in which we manipulated the language used in the program interface. We obtained further process evidence for our theory in Experiment 3, in which we made sunk costs nonsalient in the search task—as expected, cross-cultural effects were largely mitigated.

Boundedly Rational Expectations in Insurance Decision Making: Experimental and Field Evidence

We examine a type of behavioral regularities in insurance decision making, namely instances when consumers do not fully take into account the informational value of the insurer’s offered premium. Specifically, we study scenarios when the consumer is less informed about the loss probability than the insurer. We examine basic violations of rational expectations, with which the consumer overestimates the loss probability beyond what could be inferred from the premise that the insurer must seek to break even or earn a profit over the risk to be covered. We report a field study and an experiment that reveal systematic occurrence of such violations. Violations were especially frequent at low premium levels, and the demand for insurance had an inverted-U dependence on the premium. Our findings suggest that, when consumers form beliefs over the loss probability, they take into account the offered premium to some extent, but often insufficiently so.

Endogenous arrivals in batch queues with constant or variable capacity

We study batch queueing systems with continuous time, finite commuter populations, single server, and endogenously determined arrival times. Symmetric equilibrium solutions in mixed strategies are constructed and subsequently tested in two experiments that examine two different batch queueing systems, one with a fixed server capacity, and the other with a variable server capacity. With experience in playing the stage queueing game repeatedly, experimental results from groups of twenty subjects support equilibrium play on the aggregate level when the server capacity is fixed and commonly known. When it is known to be variable, randomly changing from round to round, subjects diverge from equilibrium play and increase their individual payoffs substantially by significantly shortening their waiting time.