Research Paper No. 513

On the Existence of Haggling and Posted Prices in the Presence of Shoppers.

by

Charles E. Hyde.

April 1996

Department of Economics. University of Melbourne. Parkville Victoria 3052 Australia

ABSTRACT

We derive conditions under which all sellers bargain in (the Nash) equilibrium and yet other conditions under which all sellers post fixed prices. Some fraction of buyers have zero search costs but buyers are otherwise identical. Sellers are identical, have complete information about buyer search costs and incur a cost when posting a price. The model combines features of Bester (1994) and Stahl (1989). In equilibrium, buyers who search costlessly purchase from bargaining sellers, and the remaining buyers purchase from whomever they visit first. There is no equilibrium in which all sellers post fixed prices if sufficiently many buyers search costlessly, however, it is an equilibrium for all sellers to bargain under such conditions. This result allows a sharper prediction of the effect of reducing buyer search costs than does Bester's model, in which multiple pricing institutions may remain as equilibria. An alternative to Bester's explanation for why haggling is more common in the East than the West emerges. Rather than being due to unexplained cultural factors, our analysis suggests that it may be because there are relatively more buyers with low search costs (shoppers) in societies where haggling is the norm. Finally, we observe multiple equilibria that under some conditions are Pareto rankable.

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