What matters in a price negotiation: Evidence from the U.S. auto retailing industry

Abstract

While there is a great deal of theoretical and experimental literature on what factors affect bargaining outcomes, there is little empirical work based on data from real markets. In this paper we analyze negotiations for new cars, a $340 billion industry in the United States in 2010. Our results suggest that search costs, incomplete information, and bargaining disutility have an economically significant effect in real-world negotiations: we estimate that relative to an uninformed consumer, a consumer with basic information about the seller's reservation price and his own outside options captures 15% of the average dealer margin from selling an automobile. We also find that a buyer's search cost and bargaining disutility have significant effects on bargaining outcomes. Finally, our results show that while search is common, there remains a substantial group of consumers who do not engage in any of the search behaviors we measure. We hypothesize that these buyers are not aware of how easy and effective certain activities in improving negotiation outcomes can be.

Sequential Bargaining in the Field: Evidence from Millions of Online Bargaining Interactions*

“…Buyers who are more experienced in bargaining on this platform (as measured by the number of previous Best Offer negotiations the buyer has participated in) also tend to achieve lower final prices, and experienced sellers achieve higher final prices. These results are consistent with common models of bargaining in which patience or other measures of a player's bargaining power affect outcomes (Rubinstein 1982(Rubinstein , 1985Watson 1998); they are also consistent with laboratory evidence (Rapoport et al 1995) and survey data (Scott Morton et al 2011), but, to our knowledge, have not been previously confirmed with data from actual bargaining outcomes.…”

Transparency and Negotiated Prices: The Value of Information in Hospital-Supplier Bargaining

“…Prior research in consumer goods markets has largely confirmed the intuition that information can facilitate search and better decisions for buyers with imperfect information regarding product quality or costs (Sorensen 2000;Jin and Leslie 2003;Hendricks et al 2012;Bronnenberg et al 2015) or supplier willingness to accept lower prices (Zettelmeyer et al 2006;Scott Morton et al 2011). However, the mechanisms via which information impacts consumer goods may not extend to business-to-business markets where there is often no search across sellers (when products are purchased directly from manufacturers), and negotiators are professionals employed by firms and thus with different expertise and incentives than the typical consumer.…”

Competition in Posted Prices with Stochastic Discounts

“…() document the widespread use of price discounts against fixed list prices by car dealerships in California, while Goldberg (), Scott Morton et al . () and the United Kingdom's Competition Commission , 7.1) document that discounts in the private automobile market vary significantly across consumers, with some consumers receiving no discount at all off the list price. A similar pattern holds for discounts off estate agent fees in the United Kingdom: the Office of Fair Trading (, section 4.48) found that almost 50% of house sellers using an estate agent had tried to negotiate fees, with 80% of those receiving a reduction.…”