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The impact of bargaining on markets with price takers: Too many bargainers spoil the broth

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  • Gill, David
  • Thanassoulis, John

Abstract

In this paper we study how bargainers impact on markets in which firms set a list price to sell to those consumers who take prices as given. The list price acts as an outside option for the bargainers, so the higher the list price, the more the firms can extract from bargainers. We find that an increase in the proportion of consumers seeking to bargain can lower consumer surplus overall, even though new bargainers receive a lower price. The reason is that the list price for those who do not bargain and the bargained prices for those who were already bargaining rise: sellers have a greater incentive to make the bargainers' outside option less attractive, reducing the incentive to compete for price takers. Competition Authority exhortations to bargain can therefore be misplaced. We also consider the implications for optimal seller bargaining.

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Bibliographic Info

Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 53 (2009)
Issue (Month): 6 (August)
Pages: 658-674

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Handle: RePEc:eee:eecrev:v:53:y:2009:i:6:p:658-674

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Web page: http://www.elsevier.com/locate/eer

Related research

Keywords: Bargaining Price takers List price Consumer surplus;

References

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  1. Chen, Y. & Rosenthal, R.W., 1993. "Asking Prices as Commitment Devices," Papers 42, Boston University - Industry Studies Programme.
  2. Camera, Gabriele & Delacroix, Alain, 2003. "Trade Mechanism Selection in Markets with Frictions," Purdue University Economics Working Papers 1166, Purdue University, Department of Economics.
  3. Steven Salop & Joseph Stiglitz, 1977. "Bargains and ripoffs: a model of monopolistically competitive price dispersion," Special Studies Papers 94, Board of Governors of the Federal Reserve System (U.S.).
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  5. Yongmin Chen & Robert W. Rosenthal, 1994. "On the Use of Ceiling-Price Commitments by Monopolists," Papers 0045, Boston University - Industry Studies Programme.
  6. Camera, Gabriele & Selcuk, Cemil, 2004. "Price Dispersion with Directed Search," Purdue University Economics Working Papers 1173, Purdue University, Department of Economics.
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  8. Wang, Ruqu, 1995. "Bargaining versus posted-price selling," European Economic Review, Elsevier, vol. 39(9), pages 1747-1764, December.
  9. Preyas S. Desai & Devavrat Purohit, 2004. "“Let Me Talk to My Manager”: Haggling in a Competitive Environment," Marketing Science, INFORMS, vol. 23(2), pages 219-233, August.
  10. Davis, Douglas D. & Holt, Charles A., 1994. "The effects of discounting opportunities in laboratory posted-offer markets," Economics Letters, Elsevier, vol. 44(3), pages 249-253.
  11. Bester, Helmut, 1993. "Bargaining versus Price Competition in Markets with Quality Uncertainty," American Economic Review, American Economic Association, vol. 83(1), pages 278-88, March.
  12. Arnold, Michael A & Lippman, Steven A, 1998. "Posted Prices versus Bargaining in Markets with Asymmetric Information," Economic Inquiry, Western Economic Association International, vol. 36(3), pages 450-57, July.
  13. Raskovich, Alexander, 2007. "Competition or collusion? Negotiating discounts off posted prices," International Journal of Industrial Organization, Elsevier, vol. 25(2), pages 341-354, April.
  14. Maarten C. W. Janssen & José Luis Moraga-González, 2004. "Strategic Pricing, Consumer Search and the Number of Firms," Review of Economic Studies, Wiley Blackwell, vol. 71(4), pages 1089-1118, October.
  15. Cason, Timothy N. & Friedman, Daniel & Milam, Garrett H., 2003. "Bargaining versus posted price competition in customer markets," International Journal of Industrial Organization, Elsevier, vol. 21(2), pages 223-251, February.
  16. Stahl, Dale O, II, 1989. "Oligopolistic Pricing with Sequential Consumer Search," American Economic Review, American Economic Association, vol. 79(4), pages 700-712, September.
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Cited by:
  1. John Thanassoulis & David Gill, 2010. "The Optimal Marketing Mix of Posted Prices, Discounts and Bargaining," Economics Series Working Papers 479, University of Oxford, Department of Economics.
  2. Selcuk, Cemil, 2011. "Trading mechanism selection with budget constraints," MPRA Paper 36227, University Library of Munich, Germany.

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