Since I mentioned Priceline in my previous post, it seems like the right place to resurrect one of old posts on the subject. Everybody knows how Priceline works: they sell you a product with certain characteristics, without revealing it at the time of purchase. So the product is opaque. In exchange they let you bid for the product and if the bid is high enough, it’s accepted and product is sold. Or is it?
You would expect that Priceline has a bid threshold, and if you bid above it, your bid will be accepted. Well… not exactly. Here is the reason: if they had a fixed threshold, it would be fairly easy to figure out, so people would start to bid exactly that amount and Priceline would have no revenue from overbidding. Solution? Randomize: if you bid high, your bid is not necessarily accepted. On the flipside, if you consistently bid low, you might get a good deal. The details are in this academic article.
The story has an interesting continuation. There is a start-up company biddingtraveler.com that actually implements a bidding strategy on Priceline for you. From a couple of times I tried using it, it seems that their strategy amounts to a simple progressive bid increase. Still, it is interesting to see how new platforms, such as Priceline, lead to emergence of even newer services.