Essays on Dynamic Sales Mechanisms

This thesis is a collection of three essays on dynamic sales mechanisms. The first chapter analyzes the Name Your Own Price (NYOP) mechanism adopted by Priceline.com. Priceline.com, a website helping travelers obtain discount rates for travel-related items, gained prominence for its Name Your Own Price system. Under Name Your Own Price, a traveler names his price for airline tickets, hotel rooms, or car rentals. Priceline then checks if there is any seller willing to accept the offer. If no one accepts, the buyer has to wait for a certain period of time (the lockout period) before rebidding. This paper builds a one-to-many dynamic model without commitment to examine the buyer's and the sellers' equilibrium strategies. I show that without a lockout period, in equilibrium, the sellers with different costs are either almost fully discriminated or pooled in intervals except the one with the lowest possible cost. In the latter case, the buyer does not raise the bids much until the very end, so the price pattern is convexly increasing, consistent with the empirical finding, and most transactions occur just before the day of the trip, which illustrates the deadline effect that is observed in many negotiation processes. The lockout period restriction, which limits the buyer's bidding chances and seems to hurt the buyer, thus moves the transactions forward and can actually benefit a buyer in some circumstances. The second chapter studies a one-to-many negotiation process in which a seller with an indivisible object negotiates with two asymmetric buyers to determine who gets the object and at what price. The seller repeatedly submits take-it-or-leave-it offers to the two buyers until one of them accepts. Unlike a Dutch auction, the seller has the discretion to offer two different prices to the two buyers. I show that when committing to some price paths is possible, the optimal outcome for the seller stated by Myerson (1981) is achievable. When commitment is impossible, the optimal outcome is no longer attainable. Instead, there exists an equilibrium in which the seller's equilibrium payoff is the same as that in a second-price auction, which implies that the seller's payoff might be lower than in a Dutch auction. The result thus illustrates the value of a simple institution like a Dutch auction, which seems to restrict a player's freedom but actually benefits the player by providing a commitment tool. The analysis also sheds light on the procurement literature. The third chapter provides a rationale for why a seller may package goods in bundles that are too large for a consumer to consume all by himself. I show that selling in bulk packages is an alternative way for the seller to discriminate buyers when resale cannot be excluded among buyers. When bulk packages are offered, buyers who value the product more usually have stronger incentive to buy the package, and buyers who value the product less tend to buy from resale. Moreover, the seller can make more profit by selling bulk packages than by selling single-unit packages when the buyers' values of the product are more negatively correlated. Thesis Supervisor: Bengt Holmstrom Title: Paul A. Samuelson Professor of Economics Thesis Supervisor: Glenn Ellison Title: Gregory K. Palm (1970) Professor of Economics