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October 09, 2004

A Mechanism for Eliciting One Buyer's Reserve Price

How do you figure out how much consumers might pay for a new product? I came across a good idea yesterday in a paper by George Geis, though it is not new with him. The problem is that if you simply ask people for the greatest price, P, they will pay, they will not think hard enough, and you will get an inaccurate estimate of their maximum value, V. Or, if you offer to sell it to them for some price P and they accept, all you know is that V>P, but not V exactly.

So here is another idea. Tell the person to give you a price P that equals their value, V, and tell them what will happen next. What will happen next is that you randomly pick a price, R, for the product. If P>R, they may buy the product at price R. If P

This mechanism is truthtelling-- the person's best strategy is to choose P=V. If they choose lower, they might miss their chance to buy the product at a price they'd like-- maybe R>P but R

I think you could also run this with slightly different rules, saying that they MUST buy at R if RV. That might be a better idea, since my original rules (which might be different from what Geis had--I forget) would make a very high P an easy strategy that would keep all the consumer's options open.

Posted by erasmuse at October 9, 2004 08:55 AM

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