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Online Auction and List Price Revenue Management

Author

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  • René Caldentey

    () (Stern School of Business, New York University, 44 West Fourth Street, New York, New York 10012)

  • Gustavo Vulcano

    () (Stern School of Business, New York University, 44 West Fourth Street, New York, New York 10012)

Abstract

We analyze a revenue management problem in which a seller facing a Poisson arrival stream of consumers operates an online multiunit auction. Consumers can get the product from an alternative list price channel. We consider two variants of this problem: In the first variant, the list price is an external channel run by another firm. In the second one, the seller manages both the auction and the list price channels. Each consumer, trying to maximize his own surplus, must decide either to buy at the posted price and get the item at no risk, or to join the auction and wait until its end, when the winners are revealed and the auction price is disclosed. Our approach consists of two parts. First, we study structural properties of the problem, and show that the equilibrium strategy for both versions of this game is of the threshold type, meaning that a consumer will join the auction only if his arrival time is above a function of his own valuation. This consumer's strategy can be computed using an iterative algorithm in a function space, provably convergent under some conditions. Unfortunately, this procedure is computationally intensive. Second, and to overcome this limitation, we formulate an asymptotic version of the problem, in which the demand rate and the initial number of units grow proportionally large. We obtain a simple closed-form expression for the equilibrium strategy in this regime, which is then used as an approximate solution to the original problem. Numerical computations show that this heuristic is very accurate. The asymptotic solution culminates in simple and precise recipes of how bidders should behave, as well as how the seller should structure the auction, and price the product in the dual-channel case.

Suggested Citation

  • René Caldentey & Gustavo Vulcano, 2007. "Online Auction and List Price Revenue Management," Management Science, INFORMS, vol. 53(5), pages 795-813, May.
  • Handle: RePEc:inm:ormnsc:v:53:y:2007:i:5:p:795-813
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    File URL: http://dx.doi.org/10.1287/mnsc.1060.0646
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Nikolay Osadchiy & Gustavo Vulcano, 2010. "Selling with Binding Reservations in the Presence of Strategic Consumers," Management Science, INFORMS, vol. 56(12), pages 2173-2190, December.
    2. Anderson, Chris K. & Xie, Xiaoqing, 2014. "Pricing and market segmentation using opaque selling mechanisms," European Journal of Operational Research, Elsevier, vol. 233(1), pages 263-272.
    3. Sun, Daewon & Li, Erick & Hayya, Jack C., 2010. "The optimal format to sell a product through the internet: Posted price, auction, and buy-price auction," International Journal of Production Economics, Elsevier, vol. 127(1), pages 147-157, September.
    4. Jérémie Gallien & Shobhit Gupta, 2007. "Temporary and Permanent Buyout Prices in Online Auctions," Management Science, INFORMS, vol. 53(5), pages 814-833, May.
    5. repec:eee:trapol:v:62:y:2018:i:c:p:63-78 is not listed on IDEAS
    6. Hummel, Patrick, 2015. "Simultaneous use of auctions and posted prices," European Economic Review, Elsevier, vol. 78(C), pages 269-284.
    7. Woonghee Tim Huh & Ganesh Janakiraman, 2008. "Inventory Management with Auctions and Other Sales Channels: Optimality of (s, S) Policies," Management Science, INFORMS, vol. 54(1), pages 139-150, January.
    8. Xuanming Su & Fuqiang Zhang, 2008. "Strategic Customer Behavior, Commitment, and Supply Chain Performance," Management Science, INFORMS, vol. 54(10), pages 1759-1773, October.
    9. Jiang, Zhong-Zhong & Fang, Shu-Cherng & Fan, Zhi-Ping & Wang, Dingwei, 2013. "Selecting optimal selling format of a product in B2C online auctions with boundedly rational customers," European Journal of Operational Research, Elsevier, vol. 226(1), pages 139-153.
    10. Rui Yin & Yossi Aviv & Amit Pazgal & Christopher S. Tang, 2009. "Optimal Markdown Pricing: Implications of Inventory Display Formats in the Presence of Strategic Customers," Management Science, INFORMS, vol. 55(8), pages 1391-1408, August.
    11. Ødegaard, Fredrik & Anderson, Chris K., 2014. "All-pay auctions with pre- and post-bidding options," European Journal of Operational Research, Elsevier, vol. 239(2), pages 579-592.
    12. Matzke, Andreas & Volling, Thomas & Spengler, Thomas S., 2016. "Upgrade auctions in build-to-order manufacturing with loss-averse customers," European Journal of Operational Research, Elsevier, vol. 250(2), pages 470-479.

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