Opaque selling in congested systems

Abstract

Opaque selling, whereby the firm hides some product attribute until payment is completed, is proved effective in maximizing profit if used with price discrimination. We study opaque selling in a congestion-susceptible environment, which has received little attention in the literature, and show its advantages without price discrimination in two particular cases.

Introduction

Opaque selling is a pricing strategy that has been employed in various industries. The implementation of this strategy is essentially to offer the customers a lottery of getting one of the differentiated products at a uniform price. As a result, the information on certain product attributes is withheld from the customers at the time of purchase. Airline companies hiding flight time, classes, or even destinations to the customers who buy their opaque services appears to be the first and best-known example  [6]. In addition, retailing firms have also tried opaque selling for better revenue performance  [2].

Recently, the opaque selling strategy has stimulated a fast-growing body of research. Scholars have been trying to find out under what condition, and why, opaque selling is attractive to firms. One of the important results, discovered by several papers (e.g. [6], [2]), is that opaque selling captures a larger market and, if used along with regular selling strategy, increases the profit for the firm. Specifically, these papers study a monopolist firm facing Hotelling line type of customers. The firm can either sell regular (transparent) services or offer an opaque product, or a combination of both. While selling regular products only captures the customers at the two ends, offering the opaque product alone will eliminate the horizontal differentiation and thus expand the market coverage. However, due to the cannibalization effect, the total profit will shrink. One remedy, as proposed by these papers, is to offer both regular and opaque products to the customers at different prices. In this way, the firm takes advantage of market segmentation and price discrimination, and consequently captures a larger market with higher profit.

The setting in the previous papers is a commonly used one, and the result is fundamental. However, we note two limitations. First, the extant literature has studied opaque selling in service industries, but never considers congestion effect. Nevertheless, customers who seek to procure services may have to wait in the systems, which affects the firm’s strategy. Hence, the congestion-susceptible settings where queues are unavoidable and costly become plausible and require investigation. In particular, the previous result that opaque selling expands the market should be re-examined. Second, although price discrimination is advocated for the success of opaque selling, its “dark” side has been well-documented  [8]. Two common arguments against price discrimination are as follows. (1) People prefer simpler rules. Differentiated pricing based on customers’ characteristics is clearly more complex to assess than simple uniform pricing  [4]. (2) “Equal-price” conveys more sense of fairness to customers whereas different prices may induce a perception of unfairness  [9]. Therefore, it is interesting to ask whether opaque selling can still enhance profit without price discrimination.

Based on the above discussions, this paper attempts to make two extensions on the previous works. Our baseline model, which is similar to Jiang  [6], looks at a service firm with two identical servers and customers residing on a unit line. We further assume that price discrimination is not feasible in our setting, and only focus on pure opaque selling, where the firm just offers the opaque service at a uniform price to all customers. Of course, the firm can just sell regular (transparent) services.

The primary research question is how pure opaque selling compares to regular selling in terms of market coverage and profit. We find that, contrary to the known result, pure opaque selling does not always capture more market share. Our results reveal the significance of the congestion term, which is not seen in the previous works. Moreover, we identify two situations where pure opaque selling leads to higher profit. Hence, this paper advances the literature to establish positive arguments concerning the profit advantages of opaque selling without price discrimination.