Competition in Posted Prices With Stochastic Discounts
Economic Journal, Forthcoming
51 Pages Posted: 3 Mar 2010 Last revised: 23 Dec 2019
Date Written: January 16, 2015
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: Suggested Citation