Selecting optimal selling format of a product in B2C online auctions with boundedly rational customers

The advancement of Internet technology has enabled new formats for selling products in the B2C online auctions. At present, on the major online auction sites, there exist three popular selling formats, namely, the posted price, pure auction and buy-price auction formats. It is an important decision problem for a firm to select the most profitable format to sell its products through the Internet. The customer behavior is of course a crucial element of the decision process. To the best of our knowledge, most models available today assume that customers are perfectly rational. To better understand the decision process, in this paper, we incorporate the concept of bounded rationality into consideration. We first present a “behavior choice function” to characterize the behavior of the customers with bounded rationality. Then corresponding to each selling format, we construct a revenue model based on the bounded rationality for analysis. Finally, we conduct some elaborate computational experiments to investigate the performance of each revenue model for developing new managerial insights. Our computational results clearly demonstrate how the bounded rationality of customer behavior affects the choice of a preferable selling format for a B2C firm in an online auction.

► We present a “behavior choice function” to characterize the bounded rationality of customer behavior in B2C online auctions.
► We construct three revenue models based on the bounded rationality for three selling formats.
► We conduct computational experiments to investigate the performance of each revenue model for developing new managerial insights.
► Our computational results show the bounded rationality of customer behavior plays a very important role in B2C online auctions.