30 Seconds or Free! Contingent Contracts in Electronic Commerce

Authors: Hemant K. Bhargava, Shankar Sundaresan

We analyze contingent price contracts as a mechanism for mitigating the effects of increased quality uncertainty in e-commerce. A contingent contract species a sequence of possible quality levels and corresponding prices. Electronic commerce infrastructure enables the capture and dissemination of information about the likelihood of each quality level. When the public probabilities differ from the rm's private (and true) probabilities, contingent contracts can expand market size and the chance of market existence. When the market underestimates the rm's ability to deliver quality, contingent contracts are strictly optimal, and increase both the rm's expected margin and the fraction of buyers. Interestingly, the rm should offer a full-price rebate in this case. Conversely, when the market overestimates the rm's ability to deliver quality, a single-price contract is strictly optimal. Our results have actionable value in such diverse e-commerce contexts as electronic retailing, application service providers, electronic tting rooms, telecommunications services, business exchanges, and online travel booking.