The enhanced abilities of online retailers to
learn about their customers’ shopping behavior have increased fears
of dynamic pricing, a practice in which a seller sets prices based
on the estimated buyer’s willingness-to-pay. However, among online
retailers, a deviation from a one-price-for-all policy is the
exception. When price discrimination is observed, it is often in the
context of customer outrage about unfair pricing.
One setting where pricing varies is the
name-your-own-price (NYOP) mechanism. In contrast to a typical
retail setting, in NYOP markets, it is the buyer who places an
initial offer. This offer is accepted if it is above some threshold
price set by the seller. If the initial offer is rejected, the buyer
can update her offer in subsequent rounds. By design, the final
purchase price is opaque to the public; the price paid depends on
the individual buyer’s willingness-to-pay and offer strategy.
Further, most forms of NYOP employ a fixed threshold price policy.
In this paper, we compare a fixed threshold price
setting with an adaptive threshold price setting. A seller who
considers an adaptive threshold price has to weigh potentially
greater profits against customer objections about the perceived
fairness of such a policy. We first derive the optimal strategy for
the seller. We analyze the effectiveness of an adaptive threshold
price vis-à-vis a fixed threshold price on seller profit and
customer satisfaction. Further, we evaluate the moderating effect of
revealing the threshold price policy (adaptive versus fixed) to
buyers. We test our model in a series of laboratory experiments and
in a large field experiment at a prominent NYOP seller involving
real purchases. Our results show that revealing the usage of an
adaptive mechanism yields higher profits and more transactions than
not revealing this information. In the field experiment, we find
that applying a revealed adaptive threshold price can increase
profits by over 20 percent without lowering customer satisfaction.
Keywords: Name-your-own-price, bargaining games, dynamic pricing,
electronic commerce, customer satisfaction