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Researcher: priceline could allow repeat bidding, still profit Filed under Research, Business on Monday, December 6, 2004.
GAINESVILLE, Fla. — In an auction, if a bid for an item falls short, a would-be customer can try again by raising the bid.
Rapidly growing Priceline and other name-your-own-price Internet retailers typically don’t work that way. Instead, they restrict customers to a single bid, hoping they’ll wager more than the worth of a motel room, rental car or airline ticket, thus boosting profits.
A University of Florida business researcher says that may be a flawed business model, because savvy users figure out numerous ways to “game the system” and make repeat bids anyway. As a result of these “surreptitious” bidders, Scott Fay, an assistant professor of marketing at UF’s Warrington College of Business, argues it may be equally or more profitable for Priceline to raise its minimum bid prices and allow customers to bid as many times as they want.
“What hurts Priceline is when only sophisticated users rebid,” Fay said. “They would be just as well off letting everyone rebid, but they need to make it a public policy.”
Priceline is by far the largest and best known of several name-your-own-price Internet retailers that includes eBay Travel, part of eBay. Founded in 1998, Priceline earned nearly $3 billion in total revenue by 2002, according to company press releases. Known for its quirky television ads featuring William Shatner, Priceline continues to grow, especially among customers seeking hotel rooms and airline tickets. Last quarter, Priceline’s travel bookings rose 44 percent to $432 million, according to company statistics. The company makes money in part by charging a set fee for each airline ticket or other item purchased.
Customers using Priceline to find a hotel designate their desired dates, city, neighborhood and quality rating, then submit a bid. If the bid is rejected, they must change their itinerary by, for example, bidding on hotels with a different quality rating. The procedure is similar for airline tickets, with customers having the option to rebid only by changing their itinerary.
The goal of the system is to encourage at least some customers to wager more than the minimum price Priceline will accept, Fay said, but sophisticated users routinely avoid that constraint through surreptitious repeat bidding.
For hotel rooms, Fay said a common subterfuge is to make a low bid for a room in, say, a five- star hotel near Disney World in Orlando. If that bid is rejected, the customer tries again by selecting a higher bid — while allowing for the five-star hotel to be either near Disney or in an Orlando neighborhood where he or she knows no five-star hotel exists. The new bid looks to Priceline’s system like a change in itinerary but is, in effect, a back-door repeat bid on the same Disney World neighborhood five-star hotels.
The procedure is similar for airlines, with savvy users selecting flights to airports neighboring their targeted airports to bid repeatedly on what appear to be different — but are in reality identical — itineraries. The techniques are well known among many Priceline users, with at least one site, Biddingfortravel.com, outlining different strategies in detail and helping customers make the lowest possible bids by publishing other customers’ successful bids.
Fay said the activity – while not a violation of Priceline’s user agreement – hurts the company’s profits because it in effect creates a two-tiered pricing system.
“There’s an optimal price for a hotel room or airline ticket that would maximize Priceline’s profit if everybody rebid, and there’s an optimal price to maximize profit if everyone only places one bid,” Fay said. “But the problem is that some people are rebidding and some are not, and the same price can’t maximize profit for both segments of customers.”
His mathematical models, he said, show that Priceline would make just as much money if it increased its bottom-line price and allowed all users to bid repeatedly – a practice that might also be more fair to Priceline’s customers since they would all have an equal chance of paying the same price for a given hotel room or itinerary.
“Under the current system, they set the price threshold for a hotel room at, for example, at $60, don’t tell you what it is, and hope that some people bid higher,” he said. “But if they let everyone rebid, they’d probably set the price threshold at $80 and by upping the price, it turns out they would get back all the money they would have earned” from over-bidders in the current system.
A Priceline spokesman declined to comment on the findings.
Fay said that one potential caveat is that repeat bidding would quickly highlight the minimum prices that Priceline’s hotel and airline vendors are willing to accept. If that price became well known, and customers began rejecting other, more-traditional purchasing venues such as phone purchases, that could hurt vendors, he said. But Biddingfortravel.com already publishes what appear to be the minimum prices many hotels and airlines accept, and the total number of airline tickets and hotel rooms purchased via name-your-own-price channels remains relatively small, Fay said.
“Priceline would have to convince their partners that it wouldn’t really hurt them. Even though that might be true, it might be hard to convince them,” he said.
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Aaron Hoover
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