Consumer purchase decision processes

The Bidder’s Curse
http://www.iza.org/conference_files/essle2006/malmendier_u918.pdf
Abstract: Do biases matter in markets where consumers interact frequently and have opportunities to learn and sort? We study auction markets and argue that auctions amplify the effect of individual biases to overbid.

Auctions systematically pick those consumers as winners whose willingness to bid is most upward biased. Using a novel data set on eBay auctions, we find that, in the majority of auctions, the final price is higher than a fixed price at which the same good is available for immediate purchase on the same webpage. Such overbidding is most likely in auction with long listing periods, high bidder participation, high position on the website, and if the item description explicitly mentions the (higher) manufacturer price. Few biased bidders (17%) suffice to generate overbidding on average since they win the majority of auctions. Moreover, the most experienced market participants are most likely to bid suboptimally. Thus, experience does not eliminate overbidding. The latter result also indicates that overbidding reflects individual biases rather than search cost or other standard explanations for suboptimal purchase decisions.

The Exercise of Buy-It-Now Pricing in Auctions: Seller Revenue Implications
http://www.rotman.utoronto.ca/marketing/file/Kadiyali%20PRESENTATION%20PAPER%20-%20Exercise%20of%20Buy-It-Now%20Pricing%20in%20Auctions.pdf
Abstract: Buy-It-Now (BIN) auctions, or auctions that allow bidders to buy a product at a posted price, are ubiquitous in online auction markets. In this paper, we study how bidders make their decision whether to buy a product via a regular auction or via using the BIN option. We build a model of bidder’s willingness to pay (WTP) by using boundary conditions on our WTP function; this approach imposes minimal behavioral restrictions on bidder behaviors. Similarly, we construct the upper and lower bound of the seller expected revenue as a function of the BIN price based on the estimation result from the bidder WTP model.

In our empirical analysis with online notebook auction data, we find that setting a BIN price higher than the "expected" price for an item increases a bidder’s WTP, and vice versa for setting a BIN price lower. However, pure existence of BIN does not significantly affect WTP. We also find that at least 62% of sellers set their BIN prices sub-optimally from a revenue-maximization perspective. While about 15-23% of sellers set their BIN prices too high, about 39-54% of sellers set their BIN prices too low. This sub-optimality appears to stem from sellers misestimating competition among auction items. In addition to these substantive findings, we show how sellers can use our model to set optimal BIN prices.

Why price promotions aren't the best marketing strategy - Discounts don't drive up sales
http://news-info.wustl.edu/tips/page/normal/10839.html
Extract: Jan. 22, 2008 -- Sorry, Charlie. Price promotions may not be the best way to increase sales of canned tuna — or any other frequently purchased consumer good.

The iconic cartoon mascot never got the message: "StarKist doesn't want tuna with good taste; it wants tuna that tastes good." Some companies may not be getting the message that "if value is driven only by price, price becomes the only value proposition you have," said Chakravarthi Narasimhan.

Discounts are no way to increase business. According to Narasimhan, a marketing professor at the Olin Business School at Washington University in St. Louis, "managers can be overly focused on losing market share and get caught up in a mindless cycle of discounting - without regard to the long-term implications of their actions."

Take automobile manufacturers, for example. Dealers want to move more vehicles. In response, manufacturers initiate price promotions, offer rebates and lower buyers' financing costs. "The additional volume that comes from these promotions will slowly fall," Narasimhan said. "Why? In the mind of the consumer, there's always another promotion and no real pressure to buy at a particular time. This dynamic, in turn, leads companies to continue price promotions.
"Strategic consumers are those who form expectations about future prices," he explained. In other words, they anticipate that certain products fluctuate in price and react in one of several ways.