Paying for a Chance to Save Money: Buyer Behavior in Name-Your-Own-Price Markets with Bidding Fees

According to a recently introduced theory (Spann, Zeithammer and Häubl 2010), a name-your-own-price retailer should benefit from charging prospective buyers a non-refundable bidding fee rather than providing the bidding opportunity free of charge. We use an incentive-compatible experiment to provides the first empirical test of the profitability of bidding fees. Confirming the theory’s qualitative prediction, our results reveal that retailers charging moderate bidding fees make more profits than retailers charging no fees. However, the empirically optimal fee level is lower than predicted, and both entry and bidding behavior systematically deviate from the theoretical predictions. To account for these deviations, we propose and estimate a structural model of entry and bidding based on cumulative prospect theory. It incorporates two behavioral enrichments of a standard prospect-theoretic model: (1) a “joy of playing” component that captures the entertainment value of participating in bidding and (2) partial myopia whereby bidders do not fully account for the outside option of buying in the posted-price market. The proposed model adequately characterizes the observed entry and bidding behavior. Counterfactual simulations based on the estimated model reveal that both optimal bidding fees and optimal minimum bids can increase retailer profits by more than 40% compared to the no-fee alternative.