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Possibly‐Final Offers

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  • Nolan H. Miller
  • Nikita E. Piankov
  • Richard J. Zeckhauser

Abstract

A price‐setting seller faces a buyer with unknown reservation value. We show that if the buyer is sufficiently risk averse, the seller can benefit from employing a Possibly‐Final Offer (PFO) strategy. In a PFO, if the buyer rejects the seller's initial offer the seller sometimes terminates the interaction. If the seller does not terminate, he follows up with a subsequent, more attractive offer. As the buyer's risk aversion increases, the seller's expected profit under the optimal PFO approaches the full‐information profit. These results extend to contexts with endogenous commitment, multiple types of buyers, multidimensional objects, and nonseparable utility functions.

Suggested Citation

  • Nolan H. Miller & Nikita E. Piankov & Richard J. Zeckhauser, 2006. "Possibly‐Final Offers," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(3), pages 789-819, September.
    • Handle: RePEc:bla:jemstr:v:15:y:2006:i:3:p:789-819
    DOI: 10.1111/j.1530-9134.2006.00118.x
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    References listed on IDEAS

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    Cited by:

    1. Nolan Miller & Alexander Wagner & Richard Zeckhauser, 2013. "Solomonic separation: Risk decisions as productivity indicators," Journal of Risk and Uncertainty, Springer, vol. 46(3), pages 265-297, June.

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