How does a Name Your Own Price auction, such as Priceline's,...

Key Concepts

Reverse Auction Mechanism

In contrast to traditional auctions where buyers bid up the price, Name Your Own Price auctions operate in a reverse auction manner where the buyer’s bid acts as a downward negotiation. Here, the buyer essentially competes against their own pricing target, aiming to match or exceed the seller's minimum accepted price without prior knowledge of it.

Name Your Own Price Auction

This auction model allows buyers to propose a price they are willing to pay for a product or service instead of accepting a listed price. The auction works by having buyers submit bids, and if their offer meets or exceeds a seller's undisclosed minimum price, the transaction goes through. This mechanism shifts the pricing negotiation process away from the seller and introduces a consumer-driven pricing element.

Hidden Reserve Price

A key element in Name Your Own Price auctions is the hidden reserve price. This is a secret minimum threshold set by the seller that the buyer's bid must meet in order for the deal to be accepted. The fact that this reserve is undisclosed means buyers must balance submitting a competitively low bid with the risk of having their offer rejected if it falls below the threshold.

Information Asymmetry

Information asymmetry is inherent in Name Your Own Price auctions because the buyer does not know the exact reserve price, while the seller is aware of this threshold. This creates uncertainty for the buyer and necessitates strategic bidding, as they must try to guess a price that is low enough to potentially get a better deal but high enough to meet the seller's hidden requirement.

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