Buy-It-Now or Take-a-Chance: Price Discrimination Through Randomized Auctions

L. Elisa Celis, Gregory Lewis, Markus Mobius, Hamid Nazerzadeh
2014 Management science  
Increasingly detailed consumer information makes sophisticated price discrimination possible. At fine levels of aggregation, demand may not obey standard regularity conditions. We propose a new randomized sales mechanism for such environments. Bidders can "buy-it-now" at a posted price, or "take-a-chance" in an auction where the top d > 1 bidders are equally likely to win. The randomized allocation incentivizes high valuation bidders to buy-it-now. We analyze equilibrium behavior, and apply our
more » ... analysis to advertiser bidding data from Microsoft Advertising Exchange. In counterfactual simulations, our mechanism increases revenue by 4.4% and consumer surplus by 14.5% compared to an optimal second-price auction.
doi:10.1287/mnsc.2014.2009 fatcat:ctd3mj7rhbc7rgd2c7gr6lhjvy