Buyers have a choice in what they pay owing to ‘participative pricing’ such as online auctions and pay-what-you-want music albums. A new study co-authored by Vincent Mak of Cambridge Judge provides an academic framework for this trend and suggests areas for future study.
“Participative pricing” such as online auctions and pay-what-you-want pricing of albums by independent musicians have become popular some 150 years after Philadelphia retailer John Wanamaker invented the price tag to discourage haggling. There has also been a rise in academic research into the practice over the past decade or so, with a focus on the marketing implications participative pricing has had on both buyers and sellers. A just-published journal article co-authored by Dr Vincent Mak, Reader in Marketing & Decision Sciences at Cambridge Judge Business School, provides a conceptual framework for the published academic literature on such pricing, and defines a framework for further study.
Dr Vincent Mak of Cambridge Judge Business School discusses some of the paper’s findings:
We identify four different types of mechanisms for participative pricing that have developed over the past couple of decades online. These are Name Your Own Price (NYOP) auctions in which the seller decides whether or not to accept the buyer’s offer, and the outcome for one buyer is independent of other buyers’ actions (examples include NYOP bidding for hotels on Priceline.com); auctions with competition among potential buyers, in which the seller can reject bids after taking a look at them; Pay What You Want transactions in which the seller is passive; and auctions that have a publicly disclosed reserve price. There are two underlying dimensions: whether the outcome depends on other buyers, actual or potential; and whether there is an interactive mechanism for the seller to have an active role in the outcome once the buyer’s bid is submitted.
Don’t underestimate the power of emotion when it comes to participative pricing. Quite a few studies have identified how a sense of thrill and competitive buzz influence purchasing decisions in participative pricing. It’s clear – backed up by research that looked at heart rate and skin conductance response – that this sort of competitive arousal results in higher bids, and often bids higher than the buyer initially intended. This surely applies to physical auctions as well, as we’ve all seen video clips of frenzied art auctions.
Quite a few studies have established that bidders are willing to pay more in charity auctions compared to other auctions. This is because charitable bidders tend to gain a sense of utility in charitable auctions, even if they lose, in that the higher bid price will benefit good causes. But the premium that bidders are willing to pay can be moderated by several factors including the type of product and reputation of the seller.
We think there’s plenty of scope for additional research in the fascinating area of participative pricing. It would be useful to have more information on which pricing mechanisms are most profitable under different conditions. For example, Name Your Own Price mechanisms are not frequently used, but this may be because the design of such systems often aren’t optimal. One study, for example, found that allowing consumers to place joint bids on multiple items could be a profitable strategy for the seller. There has also been relatively little research into participative pricing mechanisms in the business-to-business area, including ongoing industrial procurement relationships. As the paper concludes: “By understanding how the behavioural factors drive buyer behaviour and seller profit, we see a rich array of avenues for future research as well as managerial practice.”
The article in the journal Customer Needs and Solutions – entitled “Beyond posted prices: the past, present, and future of participative pricing mechanisms” – was co-authored by Professor Martin Spann of the University of Munich; Dr Robert Zeithammer of the University of California, Los Angeles; Dr Marto Bertini of ESADE in Spain; Professor Ernan Haruvy of the University of Texas at Dallas; Professor Sandy D. Jap of Emory University; Dr Oded Koenigsberg of London Business School; Dr Vincent Mak of Cambridge Judge Business School; Professor Peter Popkowski Leszczyc of the University of Alberta; Professor Bernd Skiera of Goethe University Frankfurt; and Professor Manoj Thomas of Cornell University.