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Thursday, October 30, 2008

Research on Priceline-style Web sites Favors Package Deals, Says Management Insights

Allowing joint bidding helps reduce potential mismatch between an e-tailer's costs and the consumer's bids on name-your-own-price websites like Priceline, according to the Management Insights feature in the current issue of Management Science, the flagship journal of the Institute for Operations Research and the Management Sciences (INFORMS).

Management Insights, a regular feature of the journal, is a digest of important research in business, management, operations research, and management science. It appears in every issue of the monthly journal.

"Joint Bidding in the Name-Your-Own-Price Channel: A Strategic Analysis" is by Wilfred Amaldoss of the Fuqua School of Business at Duke University and Sanjay Jain at the Mays Business School, Texas A&M University.

In their study, the authors examine joint bidding – for example a consumer bidding on all elements of a vacation (airplane travel, rental car, and hotel) as a package. They ask if it would be better for consumers if they could place joint bids for all these separate items at a name-your-own-price (NYOP) retailer like Priceline, and if it would be profitable for the e-tailer to allow such joint bids.

The authors considered two possible outcomes: consumers seeking savings could drive down prices when bidding on packages, giving them a bargain but costing the retailer. Alternately, consumers might hope that by bidding on a package, they could obtain all the items in the package and offer more.

The authors conclude that in many cases, joint bidding benefits both consumer and retailer. They find that consumers may indeed bid more for the very same products when asked to place a joint bid rather than a separate bid for each product.

Joint bidding, they determine, increases the probability of a transaction going through and improves both a firm's profits and consumer surplus (the benefit to consumers due to the difference between what they actually pay and what they were willing to pay). The authors conducted a simulated market experiment; the results support their hypothesis.

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