I Name My Price but Don't Want the Prize: Effects of Seemingly Useful Information in the Name-Your-Own-Price Mechanism1

ABSTRACT This study investigates the effects of information provision on decision-making in an e-commerce model, the name-your-own-price mechanism, capitalizing on information asymmetry and quality uncertainty. Despite the potential benefits of this mechanism to both sellers and buyers, evidence suggests that buyers may fall prey to the winner's curse. Using a controlled experiment, two types of information provision, bid outcomes and bid recommendations, are manipulated to assist buyers' decisions. Subjects provided with accepted and rejected bid outcomes performed worse than subjects provided with only accepted bid outcomes. Furthermore, subjects provided with bid recommendations initially reacted to the information by bidding higher but subsequently learned to assimilate the information reducing the winner's curse. The findings provide interesting insights on how a potentially advantageous e-commerce model can be negatively affected by the suboptimal decisions of consumers. Keywords: Electronic commerce, Auctions, Winner's curse, Information asymmetry, Quality uncertainty 1. Introduction The increasing use of the Internet in both business-to-business (B2B) and business-to-consumer (B2C) markets has allowed a new variety of business models to emerge. Many of them are theoretically attractive from a business point of view and have, in fact, been successfully implemented in many physical settings [Fruhling and Digman 2000]. However, their online counterparts are not always as equally well received. An example is the e-commerce model commonly known as the name-your-own-price mechanism (NYOP) and used by several e-commerce vendors such as Expedia(TM) and PricelineTM. In this e-commerce model, consumers commit to prices for products or services with some uncertain attributes in exchange for possibly lower prices. The model is regarded as economically attractive in terms of providing potential extra yields to vendors and savings to consumers [Anonymous 2001]. However, consumers view the model quite differently, as many of them, especially the inexperienced, are often disappointed with the items received given the amount paid and the quality expected2. This phenomenon, where buyers enter into loss making purchases, is known as the winner's curse and has been identified in many physical settings [Akerlof 1970; Ball et al. 1991; Capen et al. 1971; Roll 1986]. Complaints surrounding the NYOP mechanism may not lie with the model itself, but rather with the suboptimal decisions of the participating buyers3. Therefore, helping the buyers make better decisions, by taking into account the characteristics of the situations they are facing, is important to the long term success of the e-commerce model. Past research into the winner's curse has relied on providing buyers with various levels of information and experience to help them learn to avoid the winner's curse, but the effectiveness of such approaches has been disappointing [Ball et al. 1991; Foreman and Murnighan 1996]. Recent studies have confirmed that the winner's curse exists in electronic auctions such as E-bay.com(TM) [Metha and Lee 1999] and across various types of electronic auction venues such as C2C and B2C [Oh 2002]. We continue this investigation by looking at the effects of information provision on decision making in situations where buyers face quality uncertainty and information asymmetry. Specifically, we investigate the prevalence of the winner's curse in the NYOP mechanism, and the effectiveness of the information provided by systems that attempt to facilitate decisions from the buyer's perspective. The rest of the paper is organized as follows. First, the NYOP mechanism is introduced, together with its economic attractiveness. We describe characteristics shared by the NYOP mechanism, i.e. quality uncertainty and information asymmetry, that often result in a behavioral phenomenon known as the winner's curse. Second, past literature is reviewed on the effectiveness of learning to avoid the winner's curse by providing buyers with information and experience. …