The Optimal Marketing Mix of Posted Prices, Discounts and Bargaining
AbstractIn 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 InfoPaper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 479.
Date of creation: 01 Feb 2010
Date of revision:
Posted prices; List prices; Bargaining; Negotiation; Haggling; Discounts; Outside option; Price takers; Competition policy; Price matching;
Find related papers by JEL classification:
- C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-03-13 (All new papers)
- NEP-BEC-2010-03-13 (Business Economics)
- NEP-COM-2010-03-13 (Industrial Competition)
- NEP-GTH-2010-03-13 (Game Theory)
- NEP-MKT-2010-03-13 (Marketing)
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