Emotional Bidders -- An Analytical and Experimental Examination of Consumers’ Behavior in Reverse Auction

E-commerce has proved to be fertile ground for new business models, which may be patented (for up to 20 years) and have potentially far-reaching impact on the ecommerce landscape. However, there is still uncertainty surrounding the survival of various electronic markets currently available on the Internet. One such electronic market is the so-called reverse auctions model, pioneered in e-commerce by Priceline.com. Some have hailed it as the new pricing paradigm that may replace the traditional one-price-for-all practice, while others consider it just another marketing gimmick. These conflicting evaluations, however, are either based on anecdotal evidence or on the face value of the business model. As a result, it has been a trial and error experience for all four parties concerned (investors, customers, auction site itself, and auction site’s partners – i.e., sellers of various products). This paper examines formally the bidding behavior of an individual customer engaged in such reverse auction. The paper explicitly models both emotional as well as economic aspects that are essential to understand the customer’s bidding strategy and feelings. Specifically, we address and model the excitement of winning (bid is accepted), the frustration of losing (bid is rejected), and the money saved (compared to best price from alternative channels). We generate a number of interesting insights related to: (1) the bidding strategies of new (potential) customers. For example, what type of individuals will unlikely to bid, and for those who will bid, how the bidding strategies (prices) change across individuals; (2) the dynamic bidding behavior of existing customersfor example, how winning and losing in previous biddings influence their future bids, and (3) the managerial implications for the reverse auction sites-for example, how to optimize an individualized subsidy program based on the expected lifetime value of a customer. We conducted experiments designed specifically to test the theoretical insights obtained.