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“Let Me Talk to My Manager”: Haggling in a Competitive Environment

  • Preyas S. Desai

    ()

    (Fuqua School of Business, Duke University, Durham, North Carolina 27708)

  • Devavrat Purohit

    ()

    (Fuqua School of Business, Duke University, Durham, North Carolina 27708)

Registered author(s):

    Although negotiating over prices with sellers is common in many markets such as automobiles, furniture, services, consumer electronics, etc., it is not clear how a haggling price policy can help a firm gain a strategic advantage or whether it is even sustainable in a competitive market. In this paper, we explore the implications of haggling and fixed prices as pricing policies in a competitive market. We develop a model in which two competing retailers choose between offering either a fixed price or haggling over prices with customers. There are two consumer segments in our analysis. One segment, the , has a lower opportunity cost of time and a lower haggling cost than the other segment, the . When both retailers follow the same pricing policy, then a haggling policy is more profitable than a fixed-price policy only when the proportion of nonhagglers is sufficiently high. We find two kinds of prisoners' dilemma: under some conditions, a more profitable haggling policy can be broken by a fixed-price policy, and under other conditions, a fixed-price policy can be broken by a haggling policy. Surprisingly, we show that under some conditions, an asymmetric outcome with one retailer haggling and the other offering a fixed price is also an equilibrium.

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    File URL: http://dx.doi.org/10.1287/mksc.1040.0045
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    Article provided by INFORMS in its journal Marketing Science.

    Volume (Year): 23 (2004)
    Issue (Month): 2 (August)
    Pages: 219-233

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    Handle: RePEc:inm:ormksc:v:23:y:2004:i:2:p:219-233
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    1. 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.
    2. 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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    4. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 50(1), pages 97-109, January.
    5. Ayres, Ian & Siegelman, Peter, 1995. "Race and Gender Discrimination in Bargaining for a New Car," American Economic Review, American Economic Association, vol. 85(3), pages 304-21, June.
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    11. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
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    14. Birger Wernerfelt, 1994. "Selling Formats for Search Goods," Marketing Science, INFORMS, vol. 13(3), pages 298-309.
    15. repec:fth:harver:1517 is not listed on IDEAS
    16. Raymond Chiang & Chester S. Spatt, 1982. "Imperfect Price Discrimination and Welfare," Review of Economic Studies, Oxford University Press, vol. 49(2), pages 155-181.
    17. Bester, Helmut, 1989. "Noncooperative Bargaining and Spatial Competition," Econometrica, Econometric Society, vol. 57(1), pages 97-113, January.
    18. Kenneth S. Corts, 1998. "Third-Degree Price Discrimination in Oligopoly: All-Out Competition and Strategic Commitment," RAND Journal of Economics, The RAND Corporation, vol. 29(2), pages 306-323, Summer.
    19. Chakravarthi Narasimhan, 1984. "A Price Discrimination Theory of Coupons," Marketing Science, INFORMS, vol. 3(2), pages 128-147.
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