The Impact of Bargaining on Markets with Price Takers: Too Many Bargainers Spoil the Broth

Abstract:     
In this paper we study how bargainers impact on markets in which firms set a list price to sell to those consumers who take prices as given. The list price acts as an outside option for the bargainers, so the higher the list price, the more the firms can extract from bargainers. We find that an increase in the proportion of consumers seeking to bargain can lower consumer surplus overall, even though new bargainers receive a lower price. The reason is that the list price for those who don't bargain and the bargained prices for those who were already bargaining rise: sellers have a greater incentive to make the bargainers' outside option less attractive, reducing the incentive to compete for price takers. Competition Authority exhortations to bargain can therefore be misplaced. We also consider the implications for optimal seller bargaining.

Number of Pages in PDF File: 36

Keywords: Bargaining, Price takers, List Price, Consumer Surplus, Posted Price, Consumer Welfare, Outside Option, Negotiation

JEL Classification: L13, D43

working papers series