1、When Should a Service Provider Utilize a Name Your Own Price Channel?1 Over$6 billion in total revenues from April 98 to present.“Opaque”products Single-bid Operates on commission plus difference between bid and price set by service provider2Research QuestionsFrom the service providers perspective:W
2、hen does service provider benefit from selling through the NYOP channel?What are the optimal prices for the“posted-price”and the NYOP channels,and how much opacity should be introduced in the NYOP channel?1.How much information about consumer demand does the service provider need to have before he c
3、ontracts with the NYOP retailer?3Real World Set-upOther“posted price”retailers(travel agents,Expedia,Travelocity)C O N S U M E R SDirect“posted price”channelsNYOPBids4Our Model Set-upC O N S U M E R S(vi 0,1)Direct“posted price”channelNYOPPosted PriceMinimum Acceptable PriceBids5Service Provider set
4、s PH and d.Consumers decide to buy or not at PHPay PH(service is guaranteed)Consumers bid with optimal value BiService Provider sets Minimum Acceptable Price PLNot BuyBuyThe NYOP Retailer(P)Bid Accepted No Transaction(Consumers whose bids are rejected cannot obtain service)Bi PLBi PLSignal of Demand
5、 yLate ConsumersPay PH(service is guaranteed)6Model Assumptions Large population of potential rational consumers with reservation price vi 0,1 Degree of“opacity”in NYOP channel(1-d),0 d 1 Discounted valuation in NYOP channel=d vi A single provider having capacity K1.Two-stage game Provider chooses t
6、he posted price PH and the opacity parameter d in the first stage.Provider chooses threshold for minimum acceptable bid PL in the second stage.Posted-price channel available to consumers in both stages NYOP channel only available in second stage7Model Assumptions(Contd)Only a fraction of consumers a
7、t any valuation is actually active in the market.yv-denotes density of active consumers having valuation v.yv U0,2Eyv=1.y is a signal of demand densityy U0,2.8Formulation 1Densities in the posted price andNYOP segments perfectly correlated,and y is a perfect signal of yv for allvaluation levels.Unce
8、rtainty completely resolved when observing yTwo Possible Formulations:If v1,v2 valuations of posted pricesegment v3,v4 valuations of NYOP segmentVolumes of the segments:y(v2-v1),y(v4-v3).9Uncertainty only partiallyresolved whenobserving yDensities in the posted price and NYOPsegment independently di
9、stributed.Thesignal y contains useful information only about the posted price segment.y is a perfect signal of posted price densityExpected Volumes:.34121 ,vvvvy-y is an imperfect signal of posted price densityWith probability h perfectly precise and with probability(1-h)completely uninformativeExpe
10、cted Volumes:34121 ,1vvvvhhy-Formulation 210Model Assumptions(Contd)Rational Expectations-consumers know the distribution function of y.Provider guarantees that the service will be available to any consumer who is active in the posted price market.If the demand in the posted price exceeds capacity s
11、uch a guarantee implies that the provider can use a sub-contractor to satisfy the demand(code sharing.)No such guarantee is offered to consumers active in the NYOP channel.After observing the signal y the provider submits the threshold price PL(y)to the retailer.Only bids in excess of this minimum p
12、rice should be accepted by the retailer.11Consumer Behavior Consumer chooses optimal bid in NYOP channel to maximize net expected payoff:2Pr1BPBdvyPBBdvCSMaxLLB-Let B(v)be the maximizer of above,then Optimal Bid Rational consumers can infer possible range of minimum acceptable pricesLLPP,*LPvBMinvB1
13、2Market Segmentation Consumer Self Selection:Do not buyBuy from NYOP retailerBuy from posted-price channel0vvv1,0if0if0)(vRvvvvvRConsumer of type v is indifferent yPvBL*Consumer of type v(y)submits a bid justequal to the minimum threshold price.vCSvCSvRNYOPposted-13Consumer Behavior(Contd.)LP vB*yPL
14、 yvvWhen-Kv12Excess Demand Possible-Kv12WhenDefinite Excess CapacityLP vB*yPL yvv14Consumer Behavior(Contd.)LPConsumer with v=(marginal posted price buyer)is indifferent between buying at posted price and bidding .Payoff at Posted Price Channelservice is guaranteedExpected Payoff at NYOPChannelLHPvd
15、Pv-v15Consumer Behavior(Contd.)Optimal Bid when Densities are Independently Distributed 2LPdvvB LPvBMinvB,*.dPyPyvLL-216Equilibrium Minimum Acceptable Price in NYOP Channel The minimum acceptable price is set so that the entire capacity is exhausted.This is the only credible pricing behavior in the
16、second stage.The provider is unable to pre-commit not to try to clear his capacity in the second stage.A big problem when capacity is large.Reminiscent of the Durable Good Monopolist who is unable to pre-commit not to cut prices in the future.17Equilibrium Minimum Acceptable Price in NYOP Channel(i)
17、Densities Perfectly Correlated(ii.a)Densities Independently Distributed,y perfect signal of posted price density yvKyvv-11(ii.b)Densities Independently Distributed,y imperfect signal of posted price density 1111hhyvKyvv-yvKyvvy-118Equilibrium Minimum Acceptable Price in NYOP ChannelFor fixed values
18、of vand d(i)When Densities are Perfectly Correlated-yyKyKyKyKdKyyPL log1 0-2 ,1minvKy Designates highest possible realization of demand that yieldsexcess capacity to be sold in the NYOP channel.y19(ii.a)When Densities are Independently Distributed-2,1y y0 21vKMinyyvdKvdyPLNote that PL(y)is increasin
19、g with y in both cases.20Benchmark-Only Posted Price Market is Availabledo not buybuy in posted price marketHPv-2110single)1(21HHHPKHPKHPdyPKdyyPMaxSales of Provider,)1min(KyPH-)21(KPH-2*single)21(KK-Transact with the NYOP retailer only if:*single*dual21Expected Payoff-Dual Channel 0vRHPv.112102-yyH
20、HdualdyKPdyyvKyPyPvLChoose d and PH to maximize above.to derive Easier to formulate as a choice of d and and use the condition Proposition 1It is never optimal for the provider to choose d and so that.12vK-Since NYOP offers an inferior product,use this channel cautiously to segment the market.Do not
21、 leave excess capacity to be sold in the NYOP under the best state of the demand y=2.vLHPvdPv-22Bayesian EquilibriumPropositions 2&3.21 Kv-Irrespective of whether or not densities are correlated,theprovider allocates half of his capacity to be sold in the PostedPrice Channel.(i)(ii)With correlation
22、posted prices are lower.HtindependenHcorrelatedPP(iii)Since the payoff function of the provider is a linear function of d,choose the highest possible d consistent with dual distribution.*1tindependencorrelatedddWith correlation,extent of opacity is lower.Introduce someopacity to sustain segmentation
23、.23(iv)*tindependencorrelatedEEBeing fully informed at the time of agreement withNYOP retailer yields lower profits.(v)0128.0KDual channel profitable only for relatively small levelof capacity.Perfect correlation4557.0KIndependently distributed24Advantages and Disadvantages of Dual ChannelsAdvantage
24、sPrices can be adjusted to exhaust capacity.Price rigidity in Posted Price Market.Market segmentation facilitates price discrimination via the introduction of a damaged good.DisadvantagesTo sustain the NYOP,opacity has to be introduced,which diminishes consumers willingness to pay.Flexibility in pri
25、cing that facilitates selling distressed capacity erodes the pre-commitment capabilities of the provider to keep high posted prices.(Durable Good Monopolist Problem)i.Service provider is unable to extract the entire revenues generated from NYOP consumers,since NYOP retailer can privately observe bid
26、s.25The Role of Correlation in Determining Advantages vs.Disadvantages Perfect Correlation implies provider is fully informed at the time of agreement.With independently distributed densities,provider only partially informed.Better information has the advantage of improved fine tuning of prices to c
27、lear capacity.Better information has the disadvantage of eroding pre-commitment power to a greater extent.Upon observation of a lower y realization the provider cuts to a greater extent with improved information.Aggravates the cannibalization threat to the posted price market.yPL*andEPHwith correlat
28、ion The disadvantage dominates,implying that260.511.520.10.20.30.40.50.60.7k=0.15tindependenLPySteepness of the Wholesale Price SchedulecorrelatedLP27Schedule of threshold wholesale price steeper whendensities are correlated.It is everywhere lower thanwhen densities are independently distributed.HLP
29、yPErosion of pre-commitment power more severe.With correlation.28Comparative Statistics00*KdKPH ,Larger capacity level,cannibalization threat moresevere.Increase opacity to protect posted pricemarket.In spite of this defensedHP29Demand Signal y Imperfect Predictor of Demand in Posted PriceExpected d
30、ensity in posted price segment11hhy-Is there an intermediate value of 0 433.0 If10 433.035.0 If1 35.0 If*hKhKhK1,0h*E*hthat maximizes the expected payoff of the provider?h0*Kh30Vertical IntegrationWhen the service provider vertically integrates theNYOP channel,the provider collects from eachconsumer
31、 the full bid B(v)instead of the wholesaleprice .yPLProposition 6Vertical integration keeps the size of each segment the same .It leads to higher posted prices and higher profits.-21Kv31Vertical Integration(Contd)When both provider and retailer use posted pricing as their business model,vertical int
32、egration eliminates the problem of double marginalization and leads to lower retail prices.When the retailer uses the NYOP model instead,vertical integration reduces the cannibalization effect.The provider is less concerned about losing sales to the NYOP segment given that he can extract the entire
33、bid of each consumer.With reduced threat to his direct marketing channel the provider can raise his retail price post integration.32Implications The existence of opacity is critical in order to sustain the dual channels strategy.The dual channel exists only for relatively small levels of capacity.It
34、 is important to optimally select the time at which the provider contracts with the NYOP retailer.An overly precise demand signal that becomes available by delaying the agreement,may not be desirable.The availability of a very precise signal provides an indication to consumers that deep price cuts a
35、re more likely in the NYOP market,thus eroding the commitment power of the provider to keep prices high Vertical Integration with the NYOP retailer leads to higher prices.33Cost and Benefits of Using NYOP Channel Benefits:Price Flexibility Facilitating Marketing Segmentation Cost:Segmentation is accomplished with opacity which reduces willingness to pay.Price adjustments are not always beneficial(the loss of commitment power).Revenue sharing with retailer.34Future Research Competition between service providers Competition between opaque channels:P vs.H
