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 don`t 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, at a cost to profits from non-bargainers. Competition Authority exhortations to bargain can therefore be misplaced. We also consider the implications for optimal seller bargaining.
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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number
329.
Find related papers by JEL classification: L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
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