“Meet Me Halfway”: The Costs and Benefits of Bargaining

Abstract

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.

Perceived Versus Negotiated Discounts: The Role of Advertised Reference Prices in Price Negotiations

“…Another consideration is hybrid pricing, such that sellers post a price but also negotiate with consumers (e.g., Chen and Rosenthal 1996;Cui, Mallucci, and Zhang 2019;Desai and Purohit 2004;Gill and Thanassoulis 2016;Riley and Zeckhauser 1983;Zeng, Dasgupta, and Weinberg 2014). According to contributions in this research stream, competition (Huang 2020;Zhang, Manchanda, and Chu 2021), the fixed costs of initiating a negotiation (Jindal and Newberry 2018), cognitive dissonance, and sunk cost fallacy (Desai and Jindal 2021) all influence the profitability of a hybrid pricing strategy. My goal is not to compare the profitability of pricing strategies, though I explore and clarify the retailer's incentive to set an exaggerated ARP under bargaining, and I establish the profit implications of posting an optimal ARP for different pricing strategies.…”

“…According to Consumer Reports (Rechtin 2016), 70% of all used car buyers negotiated the price, and 83% were able to bargain a lower price. Similarly, Jindal and Newberry (2021) find negotiated prices for more than 90% of purchases in their data, and Zhang, Manchanda, and Chu (2021) indicated that 80% of mobile phone sellers allow for negotiated discounts on Taobao.com. 2 In turn, negotiations have become more common for less expensive products, such as collectibles, sports memorabilia, clothing, toys, and books, such that online retailers often list two different prices (see the bottom panel in Figure 1).…”

Buyer-seller negotiation in consumer markets: an intention congruence approach

“…Ironically, even markets that are traditionally considered venues for haggling, such as automobile buying, are responding to buyers' proclivities, and offering more fixed price options. As Jindal and Newberry (2018) and Zhang et al (2021) point out, when buyers are known to have heterogeneous intentions to negotiate, it becomes important for firms to offer hybrid and flexible price-setting mechanisms to maximize sellers' utility.…”

“…Past research informs us that negotiation is an important tactic that can benefit both buyers and sellers in B2C markets. Findings from research suggest that negotiation can yield positive economic utility for both buyers and sellers (Holmes et al , 2017; Jindal and Newberry, 2018; Zhang et al , 2021). In addition, buyers who invoke a play orientation also accrue hedonic utility from negotiation (Dawra et al , 2015).…”

“…While it is reasonable to consider the effort and cost expended in negotiation, the focus on effort has a downside in that it ignores the search and pretransaction effort of buyers who prefer fixed prices because of reasons such as conflict avoidance, embarrassment and lower self-assessment of ability to obtain value through negotiation (Zhang et al , 2021). It is acknowledged in extant research that buyers may self-select into a fixed price mechanism because such a mechanism may be congruent with their ability (Chandran and Morwitz, 2005), expertise (Dawra et al , 2015; Evans and Beltramini, 1987) and bargaining power (Jindal and Newberry, 2018).…”