Bargaining
Encyclopedia
Bargaining or haggling is a type of negotiation
in which the buyer and seller of a good or service dispute the price which will be paid and the exact nature of the transaction that will take place, and eventually come to an agreement. Bargaining is an alternative pricing strategy to fixed price
s. Optimally, if it costs the retailer nothing to engage and allow bargaining, he can divine the buyer's willingness to spend. It allows for capturing more consumer surplus as it allows price discrimination
, a process whereby a seller can charge a higher price to one buyer who is more eager (by being richer or more desperate). Haggling has largely disappeared in parts of the world where the cost to haggle exceeds the gain to retailers for most common retail items. However, for expensive goods sold to uninformed buyers such as automobile
s, bargaining can remain commonplace.
Bargaining is also the 3rd stage of the Kübler-Ross model
(commonly known as the stages of dying).
Dickering refers to the same process, albeit with a slight negative (petty) connotation.
In Indonesia and elsewhere in Asia where locals haggle for goods and services everywhere from street markets to hotels, haggling is a strong cultural tradition that even children learn from a young age. Participating in that tradition can make foreigners feel accepted. Haggling for food items is strongly discouraged in Southeast Asia and is considered an insult, because food is seen a common necessity that is not to be treated as a tradable good.
In almost all large complex business negotiations, a certain amount of bargaining takes place. One simplified 'western' way to decide when it's time to bargain is to break negotiation into 2 stages: creating value and claiming value. Claiming value is another phrase for bargaining. Many cultures take offence when they perceive the other side as having started bargaining too soon. This offence is usually as a result of their wanting to first create value for longer before they bargain together. The Chinese culture by contrast places a much higher value on taking time to build a business relationship before starting to create value or bargain. Not understanding when to start bargaining has ruined many an otherwise positive business negotiation.
In areas where bargaining at the retail level is common, the option to bargain often depends on the presence of the store's owner. A chain store managed by clerks is more likely to use fixed pricing than an independent store managed by an owner or one of owner's trusted employees.
The store's ambiance may also be used to signal whether or not bargaining is appropriate. For instance, a comfortable and air-conditioned store with posted prices usually do not allow bargaining, but a stall in a bazaar
or marketplace
may. Supermarket
s and other chain stores almost never allow bargaining. However, the importance of ambiance may depend on the cultural commitment to bargaining. In Israel, prices on day-to-day items (clothing, toiletries) may be negotiable even in a Western style store manned by a clerk.
In India
, a sign posted with the phrase fixed price
indicates that bargaining is not allowed, although quite often this is not the case.
Players in a bargaining problem can bargain for the objective as a whole at a precise moment in time. The problem can also be divided so that parts of the whole objective become subject to bargaining during different stages.
In a classical bargaining problem the result is an agreement reached between all interested parties, or the status quo of the problem. It is clear that studying how individual parties make their decisions is insufficient for predicting what agreement will be reached. However, classical bargaining theory assumes that each participant in a bargaining process will choose between possible agreements, following the conduct predicted by the rational choice model. It is particularly assumed that each player's preferences regarding the possible agreements can be represented by a von Neumann–Morgenstern utility theorem
function.
Nash [1950] defines a classical bargaining problem as being a set of joint allocations of utility, some of which will correspond to what the players would obtain if they reach an agreement, and another which represents what they would get if they failed to do so.
A bargaining game for two players is defined as a pair (F,d) where F is the set of possible joint utility allocations (possible agreements), and d is the disagreement point.
For the definition of a specific bargaining solution it is usual to follow Nash's proposal, setting out the axioms this solution should satisfy. Some of the most frequent axioms used in the building of bargaining solutions are efficiency, symmetry, independence of irrelevant alternatives, scalar invariance, monotonicity, etc.
The Nash bargaining solution is the bargaining solution which maximizes the product of an agent's
utilities on the bargaining set.
The Nash bargaining solution, however, only deals with the simplest structure of bargaining. It is not dynamic (failing to deal with how pareto outcomes are achieved). Instead, for situations where the structure of the bargaining game is important, a more mainstream game theoretic approach is useful. This can allow players' preferences over time and risk to be incorporated into the solution of bargaining games. It can also show how the details can matter. For example the Nash bargaining solution for Prisoners' Dilemma is different from the Nash equilibrium.
in order to better understand the complexity of the negotiating process. Several key features of the processual theory include:
"Integrative refers to the potential for the parties' interests to be [combined] in ways that create joint value or enlarge the pie." Potential for integration only exists when there are multiple issues involved in the negotiation. This is because the parties must be able to make trade-offs across issues in order for both sides to be satisfied with the outcome.
methods have been designed for automated bargaining, and demonstrated efficient and effective for approximating Nash equilibrium.
Negotiation
Negotiation is a dialogue between two or more people or parties, intended to reach an understanding, resolve point of difference, or gain advantage in outcome of dialogue, to produce an agreement upon courses of action, to bargain for individual or collective advantage, to craft outcomes to satisfy...
in which the buyer and seller of a good or service dispute the price which will be paid and the exact nature of the transaction that will take place, and eventually come to an agreement. Bargaining is an alternative pricing strategy to fixed price
Fixed price
The term "fixed price" is a phrase used in the English language to mean that no bargaining is allowed over the price of a good or, less commonly, a service...
s. Optimally, if it costs the retailer nothing to engage and allow bargaining, he can divine the buyer's willingness to spend. It allows for capturing more consumer surplus as it allows price discrimination
Price discrimination
Price discrimination or price differentiation exists when sales of identical goods or services are transacted at different prices from the same provider...
, a process whereby a seller can charge a higher price to one buyer who is more eager (by being richer or more desperate). Haggling has largely disappeared in parts of the world where the cost to haggle exceeds the gain to retailers for most common retail items. However, for expensive goods sold to uninformed buyers such as automobile
Automobile
An automobile, autocar, motor car or car is a wheeled motor vehicle used for transporting passengers, which also carries its own engine or motor...
s, bargaining can remain commonplace.
Bargaining is also the 3rd stage of the Kübler-Ross model
Kübler-Ross model
The Kübler-Ross model, commonly known as The Five Stages of Grief, was first introduced by Elisabeth Kübler-Ross in her 1969 book, On Death and Dying....
(commonly known as the stages of dying).
Dickering refers to the same process, albeit with a slight negative (petty) connotation.
Contexts where bargaining is allowed
Not all transactions are open to bargaining. Both religious beliefs and regional custom may determine whether or not the seller is willing to bargain.Regional differences
In North America and Europe bargaining is restricted to expensive or one-of-a-kind items (automobiles, jewellery, art, real estate, trade sales of businesses) and informal sales settings such as flea markets and garage sales. In other regions of the world bargaining may be the norm even for small commercial transactions.In Indonesia and elsewhere in Asia where locals haggle for goods and services everywhere from street markets to hotels, haggling is a strong cultural tradition that even children learn from a young age. Participating in that tradition can make foreigners feel accepted. Haggling for food items is strongly discouraged in Southeast Asia and is considered an insult, because food is seen a common necessity that is not to be treated as a tradable good.
In almost all large complex business negotiations, a certain amount of bargaining takes place. One simplified 'western' way to decide when it's time to bargain is to break negotiation into 2 stages: creating value and claiming value. Claiming value is another phrase for bargaining. Many cultures take offence when they perceive the other side as having started bargaining too soon. This offence is usually as a result of their wanting to first create value for longer before they bargain together. The Chinese culture by contrast places a much higher value on taking time to build a business relationship before starting to create value or bargain. Not understanding when to start bargaining has ruined many an otherwise positive business negotiation.
In areas where bargaining at the retail level is common, the option to bargain often depends on the presence of the store's owner. A chain store managed by clerks is more likely to use fixed pricing than an independent store managed by an owner or one of owner's trusted employees.
The store's ambiance may also be used to signal whether or not bargaining is appropriate. For instance, a comfortable and air-conditioned store with posted prices usually do not allow bargaining, but a stall in a bazaar
Bazaar
A bazaar , Cypriot Greek: pantopoula) is a permanent merchandising area, marketplace, or street of shops where goods and services are exchanged or sold. The term is sometimes also used to refer to the "network of merchants, bankers and craftsmen" who work that area...
or marketplace
Marketplace
A marketplace is the space, actual, virtual or metaphorical, in which a market operates. The term is also used in a trademark law context to denote the actual consumer environment, ie. the 'real world' in which products and services are provided and consumed.-Marketplaces and street markets:A...
may. Supermarket
Supermarket
A supermarket, a form of grocery store, is a self-service store offering a wide variety of food and household merchandise, organized into departments...
s and other chain stores almost never allow bargaining. However, the importance of ambiance may depend on the cultural commitment to bargaining. In Israel, prices on day-to-day items (clothing, toiletries) may be negotiable even in a Western style store manned by a clerk.
In India
India
India , officially the Republic of India , is a country in South Asia. It is the seventh-largest country by geographical area, the second-most populous country with over 1.2 billion people, and the most populous democracy in the world...
, a sign posted with the phrase fixed price
Fixed price
The term "fixed price" is a phrase used in the English language to mean that no bargaining is allowed over the price of a good or, less commonly, a service...
indicates that bargaining is not allowed, although quite often this is not the case.
Behavioral theory
The personality theory in bargaining emphasizes that the type of personalities determine the bargaining process and its outcome. A popular behavioral theory deals with a distinction between hard-liners and soft-liners. Various research papers refer to hard-liners as warriors, while soft-liners are shopkeepers.Game theory
Bargaining games refer to situations where two or more players must reach agreement regarding how to distribute an object or monetary amount. Each player prefers to reach an agreement in these games, rather than abstain from doing so; however, each prefers that agreement which most favours his interests. Examples of such situations would be the bargaining involved in a labour union and the directors of a company negotiating wage increases, the dispute between two communities about the distribution of a common territory or the conditions under which two countries can start a programme of nuclear disarmament. Analyzing these kinds of problem looks for a solution specifying which component in dispute will correspond to each party involved.Players in a bargaining problem can bargain for the objective as a whole at a precise moment in time. The problem can also be divided so that parts of the whole objective become subject to bargaining during different stages.
In a classical bargaining problem the result is an agreement reached between all interested parties, or the status quo of the problem. It is clear that studying how individual parties make their decisions is insufficient for predicting what agreement will be reached. However, classical bargaining theory assumes that each participant in a bargaining process will choose between possible agreements, following the conduct predicted by the rational choice model. It is particularly assumed that each player's preferences regarding the possible agreements can be represented by a von Neumann–Morgenstern utility theorem
Von Neumann–Morgenstern utility theorem
In 1947, John von Neumann and Oskar Morgenstern exhibited four relatively modest axioms of "rationality" such that any agent satisfying the axioms has a utility function...
function.
Nash [1950] defines a classical bargaining problem as being a set of joint allocations of utility, some of which will correspond to what the players would obtain if they reach an agreement, and another which represents what they would get if they failed to do so.
A bargaining game for two players is defined as a pair (F,d) where F is the set of possible joint utility allocations (possible agreements), and d is the disagreement point.
For the definition of a specific bargaining solution it is usual to follow Nash's proposal, setting out the axioms this solution should satisfy. Some of the most frequent axioms used in the building of bargaining solutions are efficiency, symmetry, independence of irrelevant alternatives, scalar invariance, monotonicity, etc.
The Nash bargaining solution is the bargaining solution which maximizes the product of an agent's
utilities on the bargaining set.
The Nash bargaining solution, however, only deals with the simplest structure of bargaining. It is not dynamic (failing to deal with how pareto outcomes are achieved). Instead, for situations where the structure of the bargaining game is important, a more mainstream game theoretic approach is useful. This can allow players' preferences over time and risk to be incorporated into the solution of bargaining games. It can also show how the details can matter. For example the Nash bargaining solution for Prisoners' Dilemma is different from the Nash equilibrium.
Bargaining and posted prices in retail markets
Retailers can choose to sell at posted prices or allow bargaining: selling at a public posted price commits the retailer not to exploit buyers once they enter the retail store, making the store more attractive to potential customers, while a bargaining strategy has the advantage that it allows the retailer to price discriminate between different types of customer. In some markets, such as those for automobiles and expensive electronic goods, firms post prices but are open to haggling with consumers. When the proportion of haggling consumers goes up, prices tend to rise.Processual theory
This theory isolates distinctive elements of the bargaining chronologyChronology
Chronology is the science of arranging events in their order of occurrence in time, such as the use of a timeline or sequence of events. It is also "the determination of the actual temporal sequence of past events".Chronology is part of periodization...
in order to better understand the complexity of the negotiating process. Several key features of the processual theory include:
- Bargaining range
- Critical risk
- Security point
Integrative theory
Integrative bargaining (also called "interest-based bargaining," "win-win bargaining") is a negotiation strategy in which parties collaborate to find a "win-win" solution to their dispute. This strategy focuses on developing mutually beneficial agreements based on the interests of the disputants. Interests include the needs, desires, concerns, and fears important to each side. They are the underlying reasons why people become involved in a conflict."Integrative refers to the potential for the parties' interests to be [combined] in ways that create joint value or enlarge the pie." Potential for integration only exists when there are multiple issues involved in the negotiation. This is because the parties must be able to make trade-offs across issues in order for both sides to be satisfied with the outcome.
Narrative theory
A very different approach to conceptualizing bargaining is as co-construction of a social narrative, where narrative, rather than economic logic drives the outcome.Automated bargaining
When a bargaining situation is complex, finding Nash equilibrium will be difficult using game theory. Evolutionary computationEvolutionary computation
In computer science, evolutionary computation is a subfield of artificial intelligence that involves combinatorial optimization problems....
methods have been designed for automated bargaining, and demonstrated efficient and effective for approximating Nash equilibrium.
Anchor Pricing
Anchor price is the first call that is made during a bargain. Due to the first call a condition of biased pricing is set which tilts the bargain towards the first caller.See also
- Discounts and allowancesDiscounts and allowancesDiscounts and allowances are reductions to a basic price of goods or services.They can occur anywhere in the distribution channel, modifying either the manufacturer's list price , the retail price , or the list price Discounts and allowances are reductions to a basic price of goods or services.They...
- Group buy
- RetailingRetailingRetail consists of the sale of physical goods or merchandise from a fixed location, such as a department store, boutique or kiosk, or by mail, in small or individual lots for direct consumption by the purchaser. Retailing may include subordinated services, such as delivery. Purchasers may be...
- Intra-household bargainingIntra-household bargainingIntra-household bargaining refers to negotiations that occur between members of a household in order to arrive at decisions regarding the household unit....
Further reading
The articles in the list were not used in the creation of this article, but provide further background information on the topic. If you are reading this article, and have access to these sources, please consider editing this article and adding references from these sources. -- if you've added a reference, please remove the article from this section.- Uchendu, Victor. "Some Principles of Haggling in Peasant Markets." in Economic Development and Cultural Change, Vol. 16, No. 1 (Oct., 1967), pp. 37–50.
- Definitions: Bargaining, and Bargaining Zone.
- Psychological perspective of when we bargain in desperation.
- Ethnographic analysis of tourists haggling for souvenirs: Gillespie, A. (2007). In the other we trust: Buying souvenirs in Ladakh, North India, Academia.edu.
- On bargaining theory: Abhinay Muthoo. "Bargaining Theory with Applications", Cambridge University Press, 1999.
- On automated bargaining: Tim Gosling, Nanlin Jin & Edward TsangEdward TsangEdward Tsang is a Computer Science professor at the University of Essex. He holds a first degree in Business Administration from the Chinese University of Hong Kong , and an MSc and PhD in Computer Science from the University of Essex...
, Games, supply chains and automatic strategy discovery using evolutionary computation, in J-P. Rennard (Eds.), Handbook of research on nature-inspired computing for economics and management, Vol II, Chapter XXXVIII, Idea Group Reference, 2007, 572-588