Name-Your-Own-Price as a Competitive Distribution Channel in the Presence of Posted Prices

Priceline.com patents the innovative marketing strategy, Name-Your-Own-Price (NYOP), that sells opaque products through customer-driven pricing. In this paper, we study how competitive suppliers with sub- stitutable, non-replenishable goods may sell their products (1) as regular goods through a direct channel at posted prices, and/or (2) as opaque goods through a third-party channel, which allows for the NYOP approach. We model the third-party channel as an intermediary firm that collects the difference between the customers’ bids and reservation prices set by the suppliers, and discuss different channel strategies and customers’ bidding strategies. We show that high-end customers may demonstrate low-end behavior (that is, name their prices prior to attending the direct channel, making an even lower bid than the low-end customers), and that the intermediary firm benefits more from horizontally differentiated goods than from vertically differentiated ones. We also use dynamic programming approach to analyze how should suppliers competitively determine channel prices for given initial inventory levels with the goal of maximizing the average expected profit, and show that time and inventory levels have very different impact in dual-channel versus single-channel settings. Our results suggest that the suppliers may not benefit from the existence of a profit-maximizing NYOP channel. In particular, a monopolist would opt out of the NYOP channel and sell at posted prices only, which implies that NYOP is not appropriate for customer discrimination in the regular-goods market. Numerical experiments show that suppliers are able to generate higher expected profits in the absence of the NYOP channel