Friday, August 29, 2014
Stephen P. King, Monash University - Department of Economics; Centre for International Finance and Regulation (CIFR); Economic Regulation Authority of Western Australia (ERA) and Demitra Patras, Monash University - Department of Economics have a new paper on Posted Prices and Bargaining: The Case of Monopoly.
ABSTRACT: If buyers can choose to initiate bargaining with a seller, how does this alter the price that the seller 'posts' in the market? And does the option of bargaining raise or lower expected welfare?
This paper develops a simple model to answer these questions. With a single seller, the potential for bargaining raises the profit maximising posted price. In part, as has been noted in related literature, this reflects the role of the posted price as a fall-back option if bargaining fails. However, our model highlights a separate effect. When the choice to bargain is endogenous, a seller will raise the posted price to encourage buyers to bargain. The posted price not only exceeds the monopoly price, it can be higher than the price a seller would set if he knew in advance that all buyers would bargain. Further, the posted price can change discontinuously in exogenous parameters such as the buyers' distribution of bargaining costs. While we assume efficient bargaining, the welfare consequences are ambiguous.