When Customers Negotiate

Attended a most interesting talk at UC this past week on negotiation models. Readers will recall that I previously covered auction analysis here. A simplified model, but great work. I will post a link to paper or slides here when I get them.

Update:Paper on dynamic pricing and negotiation, paper on channel implications of negotiation.

When Customers Negotiate: Implications for Dynamic Pricing and Supply Chain Management
Goker Aydin, Kelley School of Business, Indiana University
Haggling has become increasingly popular in recent years: 72% of American consumers haggled during the holiday season in 2008 compared to 56% a year earlier. Beyond the usual suspects such as auto dealerships and furniture stores, customers successfully bargained at stores such as Best Buy, Home Depot, Polo Ralph Lauren, and Nordstrom. This landscape presents a new challenge for retailers: whether or not to engage in bargaining. We study this question in two separate contexts: a retailer dynamically adjusting the price of a product with a short lifecycle; and a distribution channel, where both the retailer and the manufacturer have a stake in the decision to bargain.

Many retailers that were reported to discreetly allow negotiation sell short lifecycle products such as high-tech consumer electronics (e.g., Best Buy) or style goods (e.g., Nordstrom). For such products, retailers frequently change the posted price over time. In such a retail environment, the outcome of the negotiation depends on the inventory level, the remaining selling season, the retailer's bargaining power, and the posted price. We characterize the optimal posted price and the negotiation outcome as a function of inventory and time. We show that negotiation is particularly effective when the inventory level is high and/or the remaining selling season is short ... '