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BARGAINING BY CONSUMERS LEADS TO HIGHER PRICES AND FACILITATES COLLUSION AMONG SELLERS: New analysis of the economics of pricing

  • Published Date: August 2016

BARGAINING BY CONSUMERS LEADS TO HIGHER PRICES AND FACILITATES COLLUSION AMONG SELLERS: New analysis of the economics of pricing

The more that buyers seek to get a better deal for the things they want to buy, the higher prices will be overall. What’s more, increased bargaining by consumers makes it easier for competing sellers to agree to sustain higher prices. These are the central conclusions of new research by Professors David Gill and John Thanassoulis, published in the August 2016 issue of the Economic Journal.

Their study notes that bargaining is common for many goods, including some that might come as a surprise: jewellery, travel agents, electrical retailers, as well as the better known cases of cars, furniture stores and estate agents. Bargaining can allow a consumer to get a reduction off the list price. But in anticipation of bargaining, competing firms will alter their pricing.

The authors note that the same economics applies to the practice of giving discount vouchers (known as ‘couponing’ in the United States). This practice is also prominent: in 2006, American firms issued 286 billion coupons.

Professors Thanassoulis and Gill argue that bargaining and couponing will lead to price rises because of strategic interactions between firms. The list price a firm sets forms the price competition for some consumers who bargain with (or receive a coupon from) competing firms. If the list price rises, then the competing firms, anticipating an easier sale to consumers who are comparing some bargained to non-bargained prices, will raise their bargained price. In turn, slightly higher bargained prices at some firms cause all bargained prices to rise as competition is relaxed.

Anticipating all this, the competing firms see that profits will rise if they raise their list prices as that will set in train a virtuous circle (for the firms) in which price levels are pushed up across the board.

Professor Thanassoulis says that although bargaining may be great for the individual who does it, it is bad for society as a whole when elevated to a market practice. The price levels rise for those stuck with list prices; and they also rise for all bargainers. Furthermore, consumers’ overall benefits are pulled down by bargaining as they are in effect bribed by reductions off an elevated list price into buying a product that is not their best match.

The authors also show that couponing and bargaining facilitate collusion. Professor Gill notes that when consumers bargain, collusion is harder to break since any firm that tries to undercut the cartel’s price will lose customers who use its price to go back to other cartel members and bargain for a reduction. This reduces firms’ incentives to cheat on the cartel and so helps to make it more robust.

The authors conclude:

‘A naïve view would argue that since consumers who negotiate reductions off posted prices (or use discount coupons) pay lower prices than do price-takers, bargaining and discount coupons ought to be encouraged.’

‘But we find that such a policy recommendation might be counterproductive: increasing the proportion of bargainers raises list prices and bargained prices, which increases profits but makes consumers worse off.’

ENDS

Notes for editors: ‘Competition in Posted Prices With Stochastic Discounts’ by David Gill and John Thanassoulis is published in the August 2016 issue of the Economic Journal.

David Gill is in the Economics Department at Oxford University. John Thanassoulis is at Warwick Business School at the University of Warwick.

For further information: contact John Thanassoulis on +44 7961 897989 (email: John.Thanassoulis@wbs.ac.uk; website: https://sites.google.com/site/thanassoulis/); David Gill via email: david.gill@economics.ox.ac.uk; or Romesh Vaitilingam on +44-7768-661095 (email: romesh@vaitilingam.com; Twitter: @econromesh).