Strategic Consumer Cooperation in a Name‐Your‐Own‐Price Channel

Abstract

Supplier reluctance to openly advertise highly discounted products on the Internet has stimulated development of “opaque” name‐Your‐Own‐Price sales channels. Unfortunately (for suppliers), there is significant potential for online consumers to exploit these channels through collaboration in social networks. In this paper, we study three possible forms of consumer collaboration: exchange of bid result information, coordinated bidding, and coordinated bidding with risk pooling. We propose an egalitarian total utility maximizing mechanism for coordination and risk pooling in a bidding club and describe characteristics of consumers for whom participation in the club makes sense. We show that, in the absence of risk pooling, a plausible bidding club strategy using just information exchange gives almost the same benefits to consumers as coordinated bidding. In contrast, coordinated bidding with risk pooling can lead to significantly increased benefits for consumers. The benefits of risk pooling are highest for consumers with a low tolerance to risk. We also demonstrate that suppliers that actively adjust for such strategic consumer behavior can reduce the impact on their businesses and, under some circumstances, even increase revenues.