Competition in Posted Prices with Stochastic Discounts

Gill, David; Thanassoulis, John

doi:10.2139/ssrn.2564141

Cited by 7 publications

(4 citation statements)

References 45 publications

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“…Chen and Rosenthal (1996) consider a market in which the seller posts a price, but only as a commitment device to attract buyers, all of whom bargain. Desai and Purohit (2004), Cui, Mallucci, and Zhang (2014), and Gill and Thanassoulis (2009, 2016) analytically study the competitive effect of bargaining while allowing for a hybrid pricing strategy, but they do not study the mechanism by which consumers choose to bargain (e.g., bargaining costs). Riley and Zeckhauser (1983) show that fixed pricing is preferred to bargaining, but if the seller can deviate from its commitment, it is optimal to post a price and negotiate if needed.…”

Section: Literature Reviewmentioning

confidence: 99%

To Bargain or Not to Bargain: The Role of Fixed Costs in Price Negotiations

Jindal¹,

Newberry²

2018

Journal of Marketing Research

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Retailers routinely allow consumers to negotiate a discount off the posted price for big-ticket items such as home appliances and automobiles, and on online platforms such as Amazon and eBay. The profitability of such a strategy, relative to selling only at posted prices, depends on consumers’ willingness to initiate a negotiation and ability to negotiate a discount. In this article, the authors incorporate consumers’ decision of whether to negotiate into a demand model. The decision to negotiate hinges on how the expected discount from negotiation compares with the magnitude of a nonpecuniary cost that the consumer incurs by initiating the negotiation. The current study shows how this cost can be nonparametrically identified, separately from consumers’ ability to get a discount and marginal utility of income. The application of this model to individual-level data on refrigerator transactions reveals that, conditional on negotiating, consumers get, on average, 41% of the available surplus and incur an average cost of $28 to initiate a negotiation. The magnitude of these nonpecuniary costs’ not only affects retailer profits but also has implications for pricing strategy and consumer surplus. Ignoring these costs results in biased estimates of consumers’ willingness to pay, translating to annual losses of $1.6 million in the current study setting.

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Section: Literature Reviewmentioning

confidence: 99%

To Bargain or Not to Bargain: The Role of Fixed Costs in Price Negotiations

Jindal¹,

Newberry²

2018

Journal of Marketing Research

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“…The literature provides at least some support for the notion that list price collusion can only be effective if it involves additional agreements on eliminating discounts. In their seminal paper on list price collusion, Gill and Thanassoulis (2016) suggest that collusive agreements may be particularly stable, if firms distinguish between list prices and discounts. Their model, along with Harrington (2011), supports a conclusion that successful list price collusion requires, concomitantly, coordination on discounts.…”

Section: List Price Collusion With Coordination On Discountsmentioning

confidence: 99%

List Price Collusion

Boshoff

Paha

2021

J Ind Compet Trade

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Firms sometimes collude by agreeing on increases in list prices. Yet, the efficacy of such list price collusion is subject to discussion as colluding firms might, in principle, deviate secretly from the elevated prices by granting their customers discounts. This article reviews cases of list price collusion in the USA and Europe, and it presents a theory of harm suggesting that a combination of anchoring, orientation on reference points, and loss aversion may render list price collusion effective in raising transaction prices—even if firms set transaction prices in a non-coordinated fashion.

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“…They show that sellers make more profit by pricing than by bargaining when a significant portion of buyers are bargainers. Gill and Thanassoulis (2009, 2013) consider price competition among multiple sellers who also allow buyers to bargain. They conclude that with an increased portion of bargainers in the market, competing sellers would increase their posted prices, resulting in reduced social welfare.…”

Section: Literature Reviewmentioning

confidence: 99%

“…In consumer markets, bargaining is also prevalent for large ticket items (e.g., houses, cars, furniture, and expensive electronics) and services (e.g., cleaning, moving, and maintenance). Bargained discounts off posted prices are well documented in automobile, real estate, and retail industries (see, e.g., Gill and Thanassoulis 2013, and references herein). Allowing for bargaining down the posted prices, the seller firms may successfully discriminate the buyers, as buyers with different willingness to pay would settle different negotiated prices (Arnold and Lippman 1998, Feng and Shanthikumar 2018).…”

Section: Introductionmentioning

confidence: 99%

Competitive Revenue Management with Sequential Bargaining

Feng

Shanthikumar

2020

Production and Operations Management

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When firms post prices to sell their products in a competitive market, buyers often seek to bargain down the prices. The existing studies on dynamic competition, however, focus on firms’ dynamic pricing strategies without considering the possibility of bargaining. We model a random stream of buyers with heterogeneous valuations who may choose to negotiate for a discount from a posted price. When bargaining is allowed, a seller firm's competing strategy depends not only on her reservation value (i.e., her gain from an unsold item when losing the current buyer to the opponent) but also on her disagreement point (i.e., the value of an unsold item when the negotiation with an arriving buyer breaks down). We show that the reservation values and the disagreement points can play opposite roles in competition—the seller firms’ posted prices are increasing in their reservation values but are decreasing in their disagreement points. In general, a seller becomes more aggressive in price competition when her reservation value becomes lower. However, it is not always the case that a seller with a lower reservation value can successfully win the deal from an arriving buyer, as it is in pure price competition. Because of the possibility of bargaining, the buyer may end up purchasing from a seller who has a higher inventory level and a higher reservation value when the seller's disagreement point is lower than that of her opponent. Interestingly, such an equilibrium outcome can only arise when the selling season is sufficiently long. Our analysis highlights the intriguing role played by negotiation in dynamic competition for sequential selling.

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Competition in Posted Prices with Stochastic Discounts

Cited by 7 publications

References 45 publications

To Bargain or Not to Bargain: The Role of Fixed Costs in Price Negotiations

To Bargain or Not to Bargain: The Role of Fixed Costs in Price Negotiations

List Price Collusion

Competitive Revenue Management with Sequential Bargaining

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