'Meet Me Halfway': The Value of Bargaining
60 Pages Posted: 19 Jun 2017 Last revised: 8 Nov 2018
Date Written: November 2018
Bargaining is an important pricing mechanism, prevalent in both the online and offline worlds. However, little empirical work on the value of bargaining in markets exists, primarily due to the lack of real-world bargaining data. We leverage the availability of rich, transaction-level data on bargaining outcomes on an online platform to quantify the value of bargaining for sellers, buyers, and the platform. We incorporate the decision to bargain, the bargaining realization, and the purchase decision into a structural model. Using our results, we perform counterfactual analyses to derive the value of allowing bargaining on the platform. We do this by disallowing bargaining such that all sellers on the platform move to a fixed-price mechanism. We find that sellers' profits are higher after the policy change. These benefits are heterogeneous across sellers, with sellers with low reputation levels, high detailed seller ratings, and non-promotion products benefiting more. We also show that buyers' bargaining cost savings are economically significant. Thus, our findings suggest that banning bargaining is beneficial from both buyers' and a social planner's perspective. We provide some reasons for why bargaining still exists on the platform. Finally, we show that our results are robust to our assumptions and can be replicated.
Keywords: Bargaining, Pricing, Platforms, Digital Markets, Structural Models, Alibaba, China
JEL Classification: D40, L10, L11, M30, M31
Suggested Citation: Suggested Citation