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Analyzing the Simultaneous Use of Auctions and Posted Prices for Online Selling

Stephen M. Ross School of Business, University of Michigan, Ann Arbor, Michigan 48109
W. E. Simon School of Business Administration, University of Rochester, Rochester, New York 14618
W. E. Simon School of Business Administration, University of Rochester, Rochester, New York 14618
etzionh{at}bus.umich.edu
pinker{at}simon.rochester.edu
seidmannav{at}simon.rochester.edu

Many firms in the business-to-consumer market sell identical products online using auctions and posted prices at the same time. In this paper, we develop and analyze a model of the key trade-offs sellers face in such a dual-channel setting built around the optimal choice of three design parameters: the posted price, the auction lot size, and the auction duration. Our results show how a monopolist seller can increase his revenues by offering auctions and a fixed price concurrently, and we identify when either a posted price only or a dual-channel strategy is optimal for the seller. We model consumer choice of channels, and thus market segmentation, and find a unique (symmetric) auction-participation equilibrium exists in which consumers who value the item for more than its posted price use a threshold policy to choose between the two channels. The threshold defines an upper bound on the remaining time of the auction. We explain how optimizing the design parameters enables the seller to segment the market so that the two channels reinforce each other and cannibalization is mitigated. Our findings also demonstrate that there are two dominant auction design strategies in this setting: one-unit auctions that tend to be short and long multiunit auctions. The optimal strategy for the seller depends on the consumer arrival rate and the disutility of delivery delay incurred by high-valuation consumers. In either case, the optimal design of the dual channel can significantly outperform a single posted-price channel. We show even greater benefits over a naive approach to managing the two channels that optimizes each independently. Our results suggest that unless firms jointly manage these online channels, they may find that adding auctions actually reduces their revenues.

Key Words: marketing; e-commerce; online auctions
History: Received: March 18, 2003; accepted: June 1, 2005.

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