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

36 Pages Posted: 2 May 2008 Last revised: 18 Mar 2014

John E. Thanassoulis

University of Warwick - Warwick Business School; Oxford-Man Institute, University of Oxford; Nuffield College, University of Oxford

David Gill

Purdue University

Date Written: March 1, 2008

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.

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

JEL Classification: L13, D43

Suggested Citation

Thanassoulis, John E. and Gill, David, The Impact of Bargaining on Markets with Price Takers: Too Many Bargainers Spoil the Broth (March 1, 2008). European Economic Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1127627 or http://dx.doi.org/10.2139/ssrn.1127627

John E. Thanassoulis (Contact Author)

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

HOME PAGE: http://https://sites.google.com/site/thanassoulis/

Oxford-Man Institute, University of Oxford ( email )

Eagle House
Walton Well Road
Oxford, Oxfordshire OX2 6ED
United Kingdom

Nuffield College, University of Oxford ( email )

New Road
Oxford, OX1 1NF
United Kingdom

David Gill

Purdue University ( email )

610 Purdue Mall
West Lafayette, IN 47907
United States

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