retailing-negotiation

RETAILINGRetailing Format that Involves Price Bargaining between the Buyer and Seller

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• Price negotiation is a common practice in business-to-business market.

• What about in B to C market?

-Housing market

-Automobile market

Price Negotiation

What are we negotiate for?

The size of the pie in the transaction!

Where does the Pie Come from?

Buyer’s reservation price: the highest price she is willing to pay for the product.

Where does the Pie Come from?• Seller’s reservation price: The lowest price the seller is

willing to accept for selling the product.

Where does the Pie Come from?• The total surplus is the pie that is resulted from the trade!

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A Model: Negotiated Price

The transaction price of brand j purchased by consumer k:

kjljlkjkjljlkj wrwp )(

where kl ~ N(0, ) and

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22

21

...00

............

0...0

0...0

J

What decides the total size of the pie?

• From the seller side?

Decrease the cost

• From the buyer side?

Increase the willingness to pay for the product

Negotiation is to Divide the Pie between the Seller and the Buyer

What decides on the portion of the pie each party getting?• The bargaining power of the two parties!

• Seller• -Competition• -Inventory• -Quality

• Buyer

-product knowledge

-other options

-demographics (ethnicity, income, education, age, gender)

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An example in the car market

• Individual-level car purchase data in one region of U.S. over a period of a year

• No trade-in, no rebates• Mid-sized sedans, three foreign brands (unique

maker/model/vintage), 85% of the total market

-Brand 1: Share: 81.52%, mean price: $21200

-Brand 2: Share: 7.54%, mean price: $20800

-Brand 3: Share: 11.03%, mean price: $25100• 4795 transactions in the final data set

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An Empirical Application on Transaction Data: Summary Statistics of Explanatory Variables (d)

Mean Std. Dev.

Min Max

Age 42.09 13.06 17.00 92.00

Gender 0.60 0.49 0.00 1.00

Median Household Size 2.92 0.58 1.50 6.00

% of Black 5.93 10.74 0.00 100

% of Hispanic 13 9.67 0.00 55.09

% of Asian 17.58 15.92 0.00 97.30

% of College Graduates 34.04 16.79 0.00 100.00

% of Rural Population 6.07 21.02 0.00 100.00

Median Household Income($100,000)

0.57 0.21 0.12 1.50

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An Empirical Application on Transaction Data: Summary Statistics of Explanatory Variables (d)

Mean Std. Dev. Min Max

Median Value of House ($100,000)

2.54 1.10 0.43 5.00

% of Home Ownership 63.73 23.67 0.69 100.00

% of Executives 17.61 7.59 0.00 57.14

% of Technician 3.34 2.05 0.00 15.55

Finance 0.66 0.47 0.00 1.00

Days to Turn 32.27 41.59 1.00 323.00

Competition (# of dealers within 50 miles of radius)

44.37 19.34 3.00 67.00

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An Empirical Application on Transaction Data: Main Results

Parameter Estimates (γ) Mean Std. Dev

Intercept -0.902* 0.102

Age -0.010* 0.004

Gender (0 for female and 1 for male) -0.036* 0.005

Median Household Size -0.003 0.036

% of Black 0.085* 0.027

% of Hispanic 0.097* 0.026

% of Asian -0.091 0.053

% of College Graduate -0.151* 0.033

% of Rural Population 0.033 0.029

*significant at 5%

Findings• Older buyers have greater bargaining power than younger

buyers

Reason: could be that older buyers have more experience with buying cars so that they are more efficient in gathering information.

Findings• Higher educated consumers tend to have a larger

bargaining power• Reason? They tend to have lower search cost due to their

better knowledge about information sources, which can lead to a larger bargaining power

Findings• Buyers from wealthy neighborhoods (with high value of

houses) and busy buyers (e.g. executives) have low bargaining power.

• Reason? They are likely to have high opportunity costs of searching. Therefore, those buyers tend to have high search costs and low bargaining power against the dealers

Findings• Female buyers on average have less negotiation power

than male buyers.• Being Black or Hispanic reduces the relative bargaining

power of a buyer

Findings• Seller’s bargaining power decreases when competition

increases• Seller’s bargaining power decreases when inventory level

increases.

Take away• Win-win situation • Understand your customers• Choice of location (competition)• Offering of product (alternative options for consumers)

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Final away• The bargaining process may seem to be a waste of time

to people used to just taking items to a cash register, but try to enjoy the process -the key is to try to keep the price low without being arrogant or insulting. Learn to fake astonishment at a suggested price or walk slowly out of a shop if necessary…Above all, keep smiling.

-Lonely Planet: Egypt