Targeted Couponing in Online Auctions

To study the role of targeted couponing in auctions, we develop a stylized model in which bidders have heterogeneous valuations and participation costs wherein their entry probabilities are endogenous. Couponing impacts the seller’s profit in two ways: (i) impact on bidders’ entry probability including negative externalities for the bidder who does not receive a coupon and (ii) value extraction. We find that targeting a coupon to the low-valuation bidder can be optimal for the firm even if it leads to a reduction in the joint entry probability of the two bidders because of the benefit from value extraction. A novel result is that in the context of auctions it can be optimal for the seller to issue targeted coupons to the high-valuation bidder. We also find that an increase in the bidders’ valuation or reduction in the participation cost can lead to lower profit for the seller. This result is driven by the nonmonotonicity of the joint entry probability of the two bidders and the seller profits being nonmonotone functions of bidders’ valuations and participation costs.