ABSTRACT The Privacy Cost of the Second-Chance Offer

This paper examines a generalization of a two-stage game common on eBay: an ascending-price auction followed by price discrimination (the second chance offer). High bids in the auction lead to high price offers during price discrimination, and a financial disadvantage in the second stage. The disadvantage depends on (a) the amount of information revealed to the seller in the first stage, and hence the extent of privacy protection provided and (b) whether the bidder is non-strategic (ignores the possibility of price discrimination) or rational. A privacy cost of one mechanism over another is defined and studied. For the non-strategic bidder, the second chance offer provides a zero payoff. Addition of privacy protection (anonymity and bid secrecy) decreases revenue and increases expected payoff, with higher bidders benefiting more. Privacy protection can, however, decrease an individual bidder’s payoff by shielding potential buyers from the seller and thus causing an opportunity loss. If the bidder is rational, price discrimination results in a lower revenue than consecutive auctions, and is a bad strategy for the seller. Additionally, rational behavior provides more advantage to the bidder than does anonymity protection