Reference Prices as Determinants of Business‐to‐Business Price Negotiation Outcomes: An Empirical Perspective from the Chemical Industry

Abstract

Price negotiations in supply chain relationships often take place during annual pricing reviews. This study integrates transaction cost economics and reference price thinking from consumer behavior to understand better how a seller's reservation price, aspiration price, and initial price offering might influence the ultimate settlement price. We apply ridge regression to negotiation data from 282 business relationships of a German chemicals supplier with customers in six client industries. Overall, the three determinants explain 86 percent of the variation in the settlement price. A seller's reservation price is substantially less important than the aspiration price or the initial price offering. Although this outcome can be explained via a reference price perspective, transaction cost economics theory helps clarify the industry differences that determine the impact of reservation prices and initial price offerings on settlement prices.

Violations of rational choice principles in pricing decisions

“…The powerful effect of anchors is visible in negotiations (Ritov, 1996), in catalogue retailing (Krishna, Wagner, Yoon, & Adaval, 2006), in investment decisions (Shapira & Shaver, 2014), in contingent valuations (Green, Jacowitz, Kahneman, & McFadden, 1998), and even in settlements in lawsuits (Poundstone, 2010). Anchors exert a powerful influence also in B2B negotiations: a recent study suggests that settlement prices in negotiations between buyers and sellers in the chemical industry are strongly influenced by the seller's aspiration price and the seller's initial price offering (Moosmayer, Schuppar, & Siems, 2012): the more sellers in industrial markets ask for, the more they get.…”

Price negotiating for services: elucidating the ambivalent effects on customers’ negotiation aspirations

“…Our study illustrates that customers' negotiation behavior is affected by whether an offering is a good or a service, specifically by characteristics such as heterogeneity, inseparability, customization, and integration. Importantly, negotiation literature has often neglected to consider these effects and focused on either goods (e.g., White and Neale 1994), services (e.g., Adam and Shirako 2013), or a combination of the two without distinction (e.g., Van Kleef et al 2004), or has not specified the type of the negotiated object (e.g., Moosmayer et al 2012). As services negotiations may differ from goods negotiations, we recommend that to reduce omitted variable bias, future negotiation studies control for the offering type.…”

Repairing the Damage: The Effect of Price Expectations on Auto-Repair Price Quotes

“…In our experiment, the experimental design specifies reservation prices for our callers to present as their own, which means that this is not the part of the reference price literature that is relevant for our paper. Our paper is more closely related to a literature that studies the effect of reservation prices on negotiations, such as Galinsky andMussweiler (2001), Van Poucke andBuelens (2002), and Moosmayer, Schuppar, and Siems (2012). This literature has focused on identifying which of three possible references prices-the reservation price (the price at which the negotiator would be indifferent between accepting the offer and walking away), the aspiration price (the best expected result given the other negotiator), and the first offer price-has the greatest effect on the negotiated outcome.…”