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Sell Probabilistic Goods? A Behavioral Explanation for Opaque Selling

Huang, T; Yu, Y; (2014) Sell Probabilistic Goods? A Behavioral Explanation for Opaque Selling. Marketing Science , 33 (5) pp. 743-759. 10.1287/mksc.2014.0851. Gold open access

Abstract

Probabilistic or opaque selling, whereby the seller hides the exact identity of the product until after the buyer makes the payment, has been used in practice and received considerable attention in the literature. Under what conditions, and why, is probabilistic selling attractive to firms? The extant literature has offered the following explanations: to price discriminate heterogeneous consumers, to reduce supply-demand mismatches, and to soften price competition. In this paper, we provide a new explanation: to exploit consumer bounded rationality in the sense of anecdotal reasoning. We build a simple model where the firm is a monopoly, consumers are homogeneous, and there is no demand uncertainty or capacity constraint. This model allows us to isolate the impact of consumer bounded rationality on the adoption of opaque selling. We find that while it is never optimal to use opaque selling when consumers have rational expectations, it can be optimal when consumers are boundedly rational. We show that opaque selling may soften price competition and increase the industry profits due to consumer bounded rationality. Our findings underscore the importance of consumer bounded rationality and show that opaque selling might be even more attractive than previously thought.

Type: Article
Title: Sell Probabilistic Goods? A Behavioral Explanation for Opaque Selling
Location: USA
Open access status: An open access publication
DOI: 10.1287/mksc.2014.0851
Publisher version: http://dx.doi.org/10.1287/mksc.2014.0851
UCL classification: UCL > School of BEAMS
UCL > School of BEAMS > Faculty of Engineering Science
UCL > School of BEAMS > Faculty of Engineering Science > Management Science and Innovation
URI: http://discovery.ucl.ac.uk/id/eprint/1418149
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