Measuring the Frictional Costs of Online Transactions: The Case of a Name-Your-Own-Price Channel

Hann, Il-Horn; Terwiesch, Christian

doi:10.1287/mnsc.49.11.1563.20586

Cited by 204 publications

(111 citation statements)

References 14 publications

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“…) Both variants reflect the presence of search costs, yet they differ in the process with which consumers search. (Search can be costly even in electronic markets: e.g., Hann and Terwiesch 2003 show that consumers value the dis-utility of an online search activity at about $5 per search.) In the case of parallel search, consumers sample a fixed number of firms and then purchase their most preferred product among the firms searched, which might be the no-purchase option.…”

Section: Modelmentioning

confidence: 99%

On the Effects of Consumer Search and Firm Entry in a Multiproduct Competitive Market

2008

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This paper studies a model in which consumers search among multiple competing firms for products that match their preferences at a reasonable price. We focus on how easier search, possibly due to the adoption of search-facilitating technologies such as the Internet, influences equilibrium prices, assortments, firm profits, and consumer welfare. Conventional wisdom suggests that easier search creates a competition-intensifying effect that puts pressure on firms to lower their prices and reduce assortments. However, in our model we demonstrate that search also exhibits a market-expansion effect that encourages firms to expand their assortment-easier search means that each firm is searched by more consumers. Because of broader assortments, consumers are more likely to find products that better match their ideal preferences, improving the efficiency of the market. In fact, we demonstrate that the market-expansion effect can even dominate the competition-intensifying effect potentially leading to higher prices, broader assortments, more profits, and expanded welfare. KeywordsInternet, price competition, assortment, product variety, long-tail phenomenon, game theory, differentiated competition Disciplines Marketing | Other Computer Sciences | Other Education AbstractIf searching for a better price becomes easier for consumers, conventional wisdom suggests that pricing pressure will increase on firms, thereby lowering prices, reducing firm profits and narrowing assortments. There is indeed evidence that recent search facilitating technologies, such as the Internet, have in some markets reduced prices. But there is also evidence that firms have been able to maintain some pricing power. Furthermore, there is evidence that the Internet has expanded variety in some markets and this broadening of the available assortment has increased consumer welfare significantly. This paper studies a model in which firms compete on price and assortment and consumers search for products that match their preferences at a reasonable price. Easier search does exhibit a competition intensifying effect in our model, and this effect puts pressure on firms to lower their prices and reduce assortments. But we also show that easier search exhibits a market expansion effect that encourages firms to expand their assortment. Due to broader assortments, consumers are more likely to find products that match their ideal preferences, improving the efficiency of the market. In fact, we demonstrate that the market expansion effect can even dominate the competition intensifying effect potentially leading to higher prices, broader assortments, more profits and expanded welfare.

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Section: Modelmentioning

confidence: 99%

On the Effects of Consumer Search and Firm Entry in a Multiproduct Competitive Market

2008

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“…Further, empirical research using historic NYOP bidding data analyzes bidder characteristics such as frictional costs (Hann and Terwiesch, 2003;Terwiesch et al, 2005), rationality (Spann and Tellis, 2006), risk aversion (Abbas and Hann, 2010) or willingness to pay (Spann et al, 2004).…”

Section: Introductionmentioning

confidence: 99%

Delegating pricing power to customers: Pay What You Want or Name Your Own Price?

Krämer¹,

Schmidt²,

Spann³

et al. 2017

Journal of Economic Behavior & Organization

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Pay What You Want (PWYW) and Name Your Own Price (NYOP) are customerdriven pricing mechanisms that give customers (some) pricing power. Both have been used in service industries with high fixed capacity costs in order to appeal to additional customers by reducing prices without setting a reference price. In this experimental study we compare the functioning and the performance of these two pricing mechanisms. We show that both mechanisms can be successfully used to endogenously price discriminate.PWYW can be very successful if there is an additional promotional benefit to using PWYW and if marginal costs are not too high. PWYW is a very aggressive competitive strategy that achieves almost full market penetration. NYOP is a less aggressive strategy that can also be used if marginal costs are high. It reduces price competition and segments the market. Low valuation customers are more likely to use NYOP while high valuation customers prefer a posted price seller.JEL Classification Numbers: D03, D21, D22, D40, L11, M31

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“…To find the full list of prices in the nearby stores may require calling the individual stores, which is clearly time consuming (i.e., a costly activity). Finally, Hann and Terwiesch (2003) discover that consumers act as if price search is costly even when intuition suggests it should not be, possibly because of cognitive effort or limitations (e.g., Miller 1956, Roberts and Lattin 1997, Kuksov and Villas-Boas 2010. In sum, it is likely that in many markets consumers behave as if searching for price and availability is consequential (i.e., costly).…”

Section: Model Descriptionmentioning

confidence: 98%

Price Commitments with Strategic Consumers: Why It Can Be Optimal to Discount More Frequently … Than Optimal

Cachon

Feldman

2015

M&SOM

102

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I n many markets consumers incur search costs, and firms choose a long-run pricing strategy that determines how they respond to market conditions. A pricing strategy may involve commitments to take actions that do not optimize short-term revenue given the information the firm learns about demand. For example, as already suggested in the literature, the firm could commit to a single price no matter whether demand is strong or weak. We introduce a new strategy-charge a "high" price only if demand is indeed "high," otherwise offer a discount. This strategy discounts more frequently than would maximize revenue conditional on demand. Nevertheless, the frequent discounts attract consumers. We show that (i) the discount-frequently strategy is optimal (whether capacity is adjustable or not), (ii) discount-frequently is often much better than other pricing strategies, especially if no price commitment is made, and (iii) "overbuying" capacity (e.g., inventory) to attract consumers (by signaling availability and the likelihood of discounts) is a poor strategy. Contrary to some recommendations in the literature to limit markdowns and to purchase ample capacity, our results provide support for a strategy that embraces frequent discounts and moderate capacity.

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Measuring the Frictional Costs of Online Transactions: The Case of a Name-Your-Own-Price Channel

Cited by 204 publications

References 14 publications

On the Effects of Consumer Search and Firm Entry in a Multiproduct Competitive Market

On the Effects of Consumer Search and Firm Entry in a Multiproduct Competitive Market

Delegating pricing power to customers: Pay What You Want or Name Your Own Price?

Price Commitments with Strategic Consumers: Why It Can Be Optimal to Discount More Frequently … Than Optimal

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