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

L. Elisa Celis (), Gregory Lewis, Markus Mobius () and Hamid Nazerzadeh ()
Additional contact information
L. Elisa Celis: École Polytechnique Fédérale de Lausanne, CH-1015, Lausanne, Switzerland
Markus Mobius: Microsoft Research New England, Cambridge, Massachusetts 02142
Hamid Nazerzadeh: Marshall School of Business, University of Southern California, Los Angeles, California 90089

Management Science, 2014, vol. 60, issue 12, 2927-2948

Abstract: 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. This paper was accepted by Assaf Zeevi, stochastic models and simulation.

Keywords: online advertising; real-time bidding; advertisement exchange; optimal auctions (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (25)

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http://dx.doi.org/10.1287/mnsc.2014.2009 (application/pdf)

Related works:
Working Paper: Buy-it-now or Take-a-chance: Price Discrimination through Randomized Auctions (2012)
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