Negotiating Flexible Prices

Abstract

In many markets, the price of a good or service is flexible. Buyers can either buy at the posted price or attempt to negotiate a lower price. A seller’s decision about whether to allow flexible prices and subsequent outcome in these types of flexible price markets depends, in large part, on buyer behavior. Furthermore, these markets are likely to feature substantial variation in buyer valuations. In this study we experimentally examine the negotiation tendencies of buyers when prices are flexible, and the interaction of these tendencies with variation in buyer values. Specifically, how does a buyer’s value impact: (i) the buyer’s decision to negotiation the price, (ii) the buyer’s sequence of counter-offers, conditional on negotiating the price, (iii) the final negotiated sale price, and (iv) the length of the negotiation. Our results indicate that variation in buyer values does impact some parts of the negotiation process.

Keywords: Flexible Prices, Bargaining, Negotiations, Experiment

JEL Classification: C70, C91, D40, L10