DISCUSSION PAPERS IN ECONOMICS AND ECONOMETRICS
Abstract
Discussion Paper No. 1108
The Optimal Marketing Mix of Posted Prices, Discounts and Bargaining
By David Gill & John Thanassoulis
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, and posted prices increase in the proportion of bargainers. We show that consumer surplus is concave and profits are convex in the proportion of bargainers: competition authorities desire a balance between bargainers and price takers while firms would rather all consumers bargained. Finally, we study the firms' strategic decision about how much bargaining discretion sales staff should 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 forms committing to only matching the rival's posted price is also an equilibrium as price matching moderates competition.
Keywords: Posted prices; list prices; bargaining; negotiation; haggling; discounts; outside option; price takers; competition policy; price matching.
JEL Classification: C78; D43; L13.