The Effects of Advertising on Customer Retention and the Profitability of Auctions

A fundamental marketing problem faced by auctioneers is the promotion of their auction in order to recruit bidders. Merchants would like to attract as many bidders as possible to an auction, since the higher the number of bidders, the higher the expected winning price and profitability. This suggests that an intense advertising campaign that raises awareness for the largest possible customer base would be desirable. However, from a customer’s viewpoint a large number of competing bidders decreases the perceived chance of winning, which subsequently deters the customer from participating in future auctions. In this paper we examine this tradeoff between the auctioneers’ desire to expand their customer base and the bidders’ desire for attractive values. We model the entry decision of consumers based on their expected gains from participating in the auction and derive the auctioneer’s optimal advertising policy. Our results suggest that controlling growth by limiting advertising spending can encourage consumer retention and increase an auctioneer’s long term profitability.