Profitability of the Name-Your-Own-Price Channel in the Case of Risk-Averse Buyers

  • Authors:

  • Dmitry Shapiro

  • Affiliations:

  • Belk College of Business, University of North Carolina Charlotte, Charlotte, North Carolina 28223

  • Venue:
  • Marketing Science
  • Year:
  • 2011

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Abstract

In this paper, I study profitability of the name-your-own-price channel (NYOP) in the presence of risk-averse buyers. First, I provide conditions that guarantee that for the monopolistic seller the NYOP is more profitable than the posted price. Second, I consider a more competitive framework where buyers with rejected bids have access to an alternative option. I show that if under the posted-price scenario there are unserved customers with low valuations, then NYOP is more profitable than the posted price. Finally, I study whether adding the posted-price option to the NYOP will further increase the seller's profit and show that for the decreasing absolute risk-aversion utility and a monopolistic seller it does not. In the presence of an alternative option, the answer depends on whether buyers consider the posted-price option and the alternative option to be close substitutes or not. Adding the posted-price option will increase the profit in the former case and will not in the latter.