'Meet Me Halfway': The Value of Bargaining

60 Pages Posted: 19 Jun 2017 Last revised: 8 Nov 2018

See all articles by Xu Zhang

Xu Zhang

London Business School

Puneet Manchanda

University of Michigan, Stephen M. Ross School of Business

Junhong Chu

NUS Business School

Date Written: November 2018

Abstract

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

Zhang, Xu and Manchanda, Puneet and Chu, Junhong, 'Meet Me Halfway': The Value of Bargaining (November 2018). Available at SSRN: https://ssrn.com/abstract=2988631 or http://dx.doi.org/10.2139/ssrn.2988631

Xu Zhang (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

HOME PAGE: http://https://www.london.edu/faculty-and-research/faculty/profiles/x/xu-zhang

Puneet Manchanda

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-936-2445 (Phone)
734-936-8716 (Fax)

Junhong Chu

NUS Business School ( email )

15 Kent Ridge Drive
Singapore, 119245
Singapore
65-65166938 (Phone)

HOME PAGE: http://bizfaculty.nus.edu/faculty-profiles/157-junhong

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