Sell Probabilistic Goods? A Behavioral Explanation for Opaque Selling

Download or read book Sell Probabilistic Goods? A Behavioral Explanation for Opaque Selling written by Tingliang Huang and published by . This book was released on 2014 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.