Bargaining is an important pricing mechanism, prevalent in both online and offline markets. However, there is little empirical work documenting the costs and benefits of bargaining, primarily because of the lack of real-world bargaining data. We leverage rich, transaction-level bargaining data from a major online platform and supplement it with primary data to quantify the costs and benefits of bargaining for sellers, buyers, and the platform. We do this by building a structural model of buyer demand and seller pricing decisions while allowing for the existence of bargaining initiation cost, loss-of-face cost, and price discrimination. Using our results, we perform three policy simulations to quantify the importance of not distinguishing between no-bargain and failed-bargain transactions, ignoring the loss-of-face cost, and not allowing for bargaining. These simulations provide rich details on how the various costs of bargaining impact our understanding of buyer and seller behavior and transaction outcomes. Banning bargaining, in particular, benefits the buyer and the platform greatly but only has a modest benefit for sellers. Finally, we show that our results are robust to our assumptions and replicate in another product category.
This paper uses Census microdata to examine how starting a business as a franchise rather than an independent business affects its survival and growth prospects. We assess factors that influence the decision to become a franchisee and use various empirical approaches to correct for selection bias in our performance analyses. We find that franchised businesses on average exhibit higher survival rates than independent businesses; but importantly, the difference is small compared with claims in the trade press. The effect is also short lived: conditional on surviving a year or two, we no longer find survival (or growth) differences. We then explore two potential sources for this small survival advantage, namely franchisors’ screening process and the benefits arising from the brand and business know‐how provided by franchisors. We find evidence that both of the sources contribute to the franchising advantage.
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