Dual mechanism for an online retailer

While posted price and auction have typically been seen as alternatives to each other, we observe Web stores selling a product at a posted price and simultaneously running auctions for the identical product, a phenomenon that has not been studied fully. In this article, we study a dual mechanism, where an online retailer combines the two conventional mechanisms (posted price and auction) for multiple units of a product. We demonstrate that the dual mechanism can be used to achieve market segmentation when customers discount the expected utility of auctions. We characterize the customer’s decision rule and formulate a retailer’s profit function under the dual mechanism. Finally, we compare the performance of three selling mechanisms (posted price, auction, and dual) through computational experiments.