Reverse Pricing: The Impact of Sophisticated Consumers, Seller Commitment, and Competition *

With a reverse-pricing mechanism (sometimes referred to as a Name-Your-Own Price or NYOP format), a prospective buyer submits a bid for a seller’s product, and a sale occurs only if the bid exceeds a hidden threshold price. This paper models the impact of three factors in such a market: 1) customer sophistication, i.e., whether buyers can correctly anticipate the seller’s procedure for setting the threshold price; 2) seller commitment, i.e., whether the seller commits to randomly selecting the threshold price from a distribution of possible prices; and 3) competition, i.e., whether the seller faces a rival. Some key findings are: in the absence of seller commitment, the seller profits more if customers are less sophisticated; seller commitment can improve profit, but only if customers are sophisticated; a monopolist seller benefits from allowing buyers to re-bid if their previous bid was rejected, but in the presence of both competition and seller commitment, the NYOP seller may benefit from restricting consumers to a single bid. Finally, whereas, the current literature offers little insight into why a firm would employ a NYOP business model rather than simply posting prices, this paper suggests that the NYOP mechanism may offer a way to mitigate price competition with a rival. This finding leads to important new implications for structuring the NYOP channel. For example, a seller may be able to reduce the degree of price rivalry by committing to randomly selecting its price threshold and/or by prohibiting re-bids.