THE OPTIMAL MARKETING MIX OF POSTEDPRICES, DISCOUNTS AND BARGAINING

In many markets firms set posted prices which are potentially negotiable. We analyze theoptimal marketing mix of pricing and bargaining when price takers buy at posted prices butbargainers attempt to negotiate discounts. The optimal bargaining strategy involves the firmsoffering bargainers randomly-sized discounts. Competing firms keep posted prices high to weakenthe bargainers' outside option, thus forgoing the chance to increase profits from price takers byundercutting their rival. A range of posted price equilibria are possible, and the highest pricein the range increases when the proportion of bargainers goes up or the bargainers become lessskilled. We consider how firms and competition authorities might encourage more consumersto 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 shouldbe allowed. Both firms allowing full bargaining exibility is always an equilibrium - but notalways the most profitable one. If there are enough bargainers, both firms committing to onlymatching the rival's posted price is also an equilibrium: price matching moderates competition,thus raising profits....