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The optimal marketing mix of posted prices, discounts and bargaining

The optimal marketing mix of posted prices, discounts and bargaining
The optimal marketing mix of posted prices, discounts and bargaining
In many markets firms set posted prices which are potentially negotiable. We analyze the optimal marketing mix of pricing and bargaining when price takers buy at posted prices but bargainers attempt to negotiate discounts. The optimal bargaining strategy involves the firms offering bargainers randomly-sized discounts. Competing firms keep posted prices high to weaken the bargainers’ outside option, thus forgoing the chance to increase profits from price takers by undercutting their rival. A range of posted price equilibria are possible, and the higher price in the range inrceases when the proportion of bargainers goes up or the bargainers become less skilled. We consider how firms and competition authorities might encourage more consumers to bargain and determine the conditions under which each would choose to do so. Finally, we study the firms’ strategic decision about how much bargaining discretion sales staff shou! ld be allowed. Both firms allowing full bargaining flexibility is always an equilibrium - but not always the most profitable one. If there are enough bargainers, both firms committing to only matching the rival’s posted price is also an equilibrium: price matching moderates competition, thus raising profits.
Gill, David
2319117f-b14e-48c6-8a33-34f5c9d4e2ea
Thanassoulis, John
d8b5c6bb-c2e2-4a3f-b471-2a06477383f4
Gill, David
2319117f-b14e-48c6-8a33-34f5c9d4e2ea
Thanassoulis, John
d8b5c6bb-c2e2-4a3f-b471-2a06477383f4

Gill, David and Thanassoulis, John (2010) The optimal marketing mix of posted prices, discounts and bargaining

Record type: Monograph (Discussion Paper)

Abstract

In many markets firms set posted prices which are potentially negotiable. We analyze the optimal marketing mix of pricing and bargaining when price takers buy at posted prices but bargainers attempt to negotiate discounts. The optimal bargaining strategy involves the firms offering bargainers randomly-sized discounts. Competing firms keep posted prices high to weaken the bargainers’ outside option, thus forgoing the chance to increase profits from price takers by undercutting their rival. A range of posted price equilibria are possible, and the higher price in the range inrceases when the proportion of bargainers goes up or the bargainers become less skilled. We consider how firms and competition authorities might encourage more consumers to bargain and determine the conditions under which each would choose to do so. Finally, we study the firms’ strategic decision about how much bargaining discretion sales staff shou! ld be allowed. Both firms allowing full bargaining flexibility is always an equilibrium - but not always the most profitable one. If there are enough bargainers, both firms committing to only matching the rival’s posted price is also an equilibrium: price matching moderates competition, thus raising profits.

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Published date: 17 March 2010

Identifiers

Local EPrints ID: 80201
URI: http://eprints.soton.ac.uk/id/eprint/80201
PURE UUID: 8042ddf7-7e1c-4197-8f3f-009e72d36dde

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Date deposited: 24 Mar 2010
Last modified: 10 Dec 2021 17:37

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Contributors

Author: David Gill
Author: John Thanassoulis

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