Optimal bidding in a participative mechanism with bundling and rebidding options

This paper studies a name-your-own-price (NYOP) mechanism in which the retailer allows buyers to participate in the pricing process by submitting bids. Buyers can place both joint and individual bids to purchase products either as a bundle or individually. The retailer utilizes NYOP and posted-price channels simultaneously. The focus of this paper is to assess the impact of adding the postedprice channel and bundling option on buyer behavior and retailer profit. The paper develops a two-stage model where the first stage involves the buyer’s decision on participating in NYOP. Moreover, buyers can choose between bidding for a bundle or a single item. Decisions in the second stage depend on the outcome of the first stage. Four distinct purchasing scenarios are formulated to outline the potential ways that buyers can use to purchase products. Furthermore, the buyers’ learning effect on their bidding strategy is considered. A dynamic programming approach with backward induction is employed to solve the problem. Moreover, the concavity analysis is used to obtain the solution of each nonlinear subproblem. Then, a solution algorithm based on mathematical analysis is proposed. Results reveal that the frictional costs of the first period have a greater impact on the buyer utility than those of the second period. Moreover, applying the NYOP alongside the posted-price can enhance the retailer’s profit. In particular, the retailer can use the NYOP and bundling mechanisms as encouraging tools to attract buyers and increase his profit. Thus, NYOP is a very effective instrument for market penetration.