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The Optimal Marketing Mix of Posted Prices, Discounts and Bargaining

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  • John Thanassoulis
  • David Gill

Abstract

In many markets firms set posted prices which are potentially negotiable.� We analyze the optimal marketing mix of pricing and bargaining when price takers buy at posted prices but bargainers attempt to negotiate discounts.� The optimal bargaining strategy involves the firms offering bargainers randomly-sized discounts.� Competing firms keep posted prices high to weaken the bargainers' outside option, thus forgoing the chance to increase profits from price takers by undercutting their rival.� A range of posted price equilibria are possible, and the higher price in the range inrceases when the proportion of bargainers goes up or the bargainers become less skilled.� We consider how firms and competition authorities might encourage more consumers to bargain and determine the conditions under which each would choose to do so.� Finally, we study the firms' strategic decision about how much bargaining discretion sales staff should be allowed.� Both firms allowing full bargaining flexibility is always an equilibrium - but not always the most profitable one.� If there are enough bargainers, both firms committing to only matching the rival's posted price is also an equilibrium: price matching moderates competition, thus raising profits.

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Bibliographic Info

Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 479.

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Date of creation: 01 Feb 2010
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Handle: RePEc:oxf:wpaper:479

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Related research

Keywords: Posted prices; List prices; Bargaining; Negotiation; Haggling; Discounts; Outside option; Price takers; Competition policy; Price matching;

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References

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  1. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-69, July.
  2. 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.
  3. Gill, David & Thanassoulis, John, 2009. "The impact of bargaining on markets with price takers: Too many bargainers spoil the broth," European Economic Review, Elsevier, vol. 53(6), pages 658-674, August.
  4. Wang, Ruqu, 1995. "Bargaining versus posted-price selling," European Economic Review, Elsevier, vol. 39(9), pages 1747-1764, December.
  5. Camera, Gabriele & Selcuk, Cemil, 2004. "Price Dispersion with Directed Search," Purdue University Economics Working Papers 1173, Purdue University, Department of Economics.
  6. Zhiqi Chen, 1993. "How Low is a Garanteed-Lowest-Price?," Carleton Industrial Organization Research Unit (CIORU) 93-03, Carleton University, Department of Economics.
  7. 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.
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Cited by:
  1. Dmitry Lubensky, 2013. "A Model of Recommended Retail Prices," Working Papers 2013-14, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  2. Dmitry Lubensky, 2011. "A Model of Recommended Retail Prices," Working Papers 2011-06, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  3. Selcuk, Cemil, 2012. "Seasonal Cycles in the Housing Market," Cardiff Economics Working Papers E2012/1, Cardiff University, Cardiff Business School, Economics Section.

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