Play Hardball in Haggling?: An Upside of Bargaining Costs
51 Pages Posted: 18 Feb 2021 Last revised: 30 Sep 2021
Date Written: September 30, 2021
A consumer's cost of bargaining, which is typically assumed to be exogenously determined, lowers the available surplus and can lead to a negotiation impasse. In this paper, we allow for the possibility that a seller, by managing his own response time, can influence a consumer's bargaining costs thereby changing the consumer's willingness-to-pay (WTP) for the product. In a set of laboratory experiments, we find evidence that relative to fixed pricing, bargaining could result in an increase in WTP and consequently in purchase likelihood, independent of the distribution of bargaining power. The increase in WTP from bargaining also persists under the widely prevalent hybrid pricing mechanism where the seller posts a fixed price and the consumer decides whether or not to negotiate. We find that the increase in WTP is driven by the seller's response time, and that this positive effect stems from the consumer's susceptibility to sunk cost fallacy as opposed to cognitive dissonance. The results provide evidence that a seller can potentially benefit from manipulating a consumer's bargaining costs by strategically taking longer to respond to the buyer's offers or counter-offers. Analysis based on millions of transactions on eBay provide external validity to our findings. Finally, based on a calibration exercise, we find that between 21% and 39% of the increase in profits under bargaining can be attributed to an increase in WTP, independent of any price discrimination benefits. We discuss the implications of these findings for researchers as well as practitioners.
Keywords: price negotiations, fixed pricing, behavioral economics, sunk cost fallacy, cognitive dissonance
JEL Classification: C7, D9
Suggested Citation: Suggested Citation