Competition in Posted Prices With Bargaining

Abstract:     
In this paper we study price competition between firms when some consumers attempt to bargain while others buy at the public list or posted prices. Even though bargainers succeed in negotiating discounts off the list prices, their presence dampens competitive pressure in the market by reducing the incentive to undercut a rival's list price, thus raising all prices and increasing profits. Welfare falls because of the uncertainty in the bargaining process, which generates some misallocation of products to consumers. We also find that the bargainers facilitate collusion by reducing the market share that can be gained from a deviation.

Number of Pages in PDF File: 25

Keywords: Posted prices, list prices, collusion, bargaining, negotiation, haggling, discounts, outside option, price takers, Hotelling line.

JEL Classification: C78, D43, L13

working papers series