Buy-it-now or Take-a-chance: Price Discrimination through Randomized Auctions

L. Elisa Celis, Gregory Lewis, Markus M. Mobius, Hamid Nazerzadeh

NBER Working Paper No. 18590
Issued in December 2012
NBER Program(s):   IO

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 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.

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Acknowledgments

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