Competition in Posted Prices With Stochastic Discounts

Economic Journal, Forthcoming

WBS Finance Group Research Paper No. 136

51 Pages Posted: 3 Mar 2010 Last revised: 23 Dec 2019

See all articles by David Gill

David Gill

Purdue University, Department of Economics

John E. Thanassoulis

University of Warwick - Warwick Business School; UK Competition and Markets Authority; Oxford-Man Institute, University of Oxford

Multiple version iconThere are 3 versions of this paper

Date Written: January 16, 2015

Abstract

We study price competition between firms over public list or posted prices when a fraction of consumers (termed ‘bargainers’) can subsequently receive discounts with some probability. Such stochastic discounts are a feature of markets in which some consumers bargain explicitly and of markets in which sellers use the marketing practice of couponing. Even though bargainers receive reductions off the posted prices, the potential to discount dampens competitive pressure in the market, thus raising all prices and increasing profits. Welfare falls because of the stochastic nature of the discounts, which generates some misallocation of products to consumers. We also find that stochastic discounts facilitate collusion by reducing the market share that can be gained from a deviation.

Keywords: Posted prices, list prices, collusion, bargaining, negotiation, haggling, discounting, coupons, price takers.

JEL Classification: C78, D43, L13

Suggested Citation

Gill, David and Thanassoulis, John E., Competition in Posted Prices With Stochastic Discounts (January 16, 2015). Economic Journal, Forthcoming, WBS Finance Group Research Paper No. 136, Available at SSRN: https://ssrn.com/abstract=1562528 or http://dx.doi.org/10.2139/ssrn.1562528

David Gill

Purdue University, Department of Economics ( email )

610 Purdue Mall
West Lafayette, IN 47907
United States

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/

UK Competition and Markets Authority ( email )

Victoria House
37 Southampton Row
London, WC1B 4AD
United Kingdom

Oxford-Man Institute, University of Oxford ( email )

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

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