The Optimal Marketing Mix of Posted Prices, Discounts and Bargaining
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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