The data suggests that price in information asymmetric markets is set based not only on the market imperfection, but also on the expectation that customers will haggle and seek haggled purchases. While price information asymmetry allows price discrimination and higher prices like many market imperfections do, the final price does not lay on this alone. Utility from the act of bargaining is recognized and creates an additional buffer over this increased price. The price buffer adds to the previously ‘intended’ price (ie. The price that would have existed in a non-haggling market), and is a mechanism by which market recognizes customers’ utility from haggling and charges them for it. The utility is not gone uncharged by a market. Prices are based on anticipation that customers will more likely buy if they get to haggle for a good.
A resultant view might follow that: the mechanism results in consumer surplus falling and producer surplus gaining an edge. This logic does not hold in the light of haggling truly producing a kind of utility for the consumer. The argument can be made that the market is simply charging the consumer for this through elevated prices from the get-go. Indeed, this paves the way for the next point of contention: how are non-hagglers accounted for? Interviews and focus group discussions, sellers often identified two distinct groups of consumers. The majority being those looking to haggle, and a minority of customers (‘five percent’, one storekeeper went as far to stress) who perform their shopping searching different prices, but not participating in haggling. A very important point of contention, considering that the vast majority of haggling markets have been replaced by markets with fixed prices in developed economies; most consumers are non-hagglers. This is discussed in the next section with the help of a haggling model.
Haggling Market-Price Model
In a haggling market with multiple sellers, a seller is faced with two options: charge an elevated price that will satisfy the haggling customer and their need to bargain, or offer a lower fixed price which will appeal to the customer who conducts their search without haggling. Based on this assumption, the following model can be used to describe haggling in markets, with the behavioral effect of gaining utility from bargaining considered:
Figure 1: Haggling Market Price Model
Where,
Haggling Buyers are buyers who in their information search, and product search, will act on opportunities to haggle – we will assume that they gain utility from the act of haggling (the extent and success are not relevant in our purview)
Non-Haggling Buyers are buyers who will not act on opportunities to haggle in their information and product search, choosing to instead take the price information at face value and continue the search
M 0 is a market with primarily haggling buyers and a market imperfection of information asymmetry
M 1 is a market with information asymmetry but in which most buyers refuse to haggle in their search
M 2 is a market without the market imperfection of information asymmetry (and therefore cannot house haggling situations, see assumptions below)
P 0 is the market price without market imperfections and non-haggling buyers dominant
P 1 is the market price with the market imperfection of information asymmetry and non-haggling buyers dominant
P 2 is the upper price level of prices sellers will ask of haggling buyers in a market with information asymmetry and haggling buyers dominant
x + y is the range of prices sellers will negotiate with those whom are identified as hagglers
y is the range of prices sellers will offer to those they identify as non-hagglers
The model assumes markets exist in which haggling negotiations occur, that they must contain information asymmetry about product prices, and that such markets can seat two types of consumers: haggling buyers and non-haggling buyers. Non-hagglers perform information searches in the market but do not partake in haggling. An additional assumption is that sellers cannot identify whether a consumer is a haggler or a non-haggler. I do not assume anything about the factors that result in the formation of these two separate groups, nor is it in the purview of my data collection (inferences however, I feel can be drawn later). Finally, I propose, that the market can develop in multiple stages, each which bring about a change in price levels and buyer-seller interactions.
I propose that an early market stage M0 exists in which haggling buyers (those who gain utility from the act of haggling) are the dominant consumer group; price and information asymmetry exists. The market price range reflects the demand for haggling. As most buyers are hagglers, consumers will face price levels ranging from x + y (that is, P2 to P0), with the range x being dominant. This range x represents the previously postulated ‘price buffer’. When faced with a consumer, sellers have the choice of a) offering an elevated price to take advantage of/defend against possible haggling 4 b) offering a fixed price to a non-haggler who will search without participating in haggling. Sellers must ‘bet’ – they do not have prescience. Wrong “bets” can result in losing a non-haggler. The market, over time, develops into M1 in which non-haggling buyers become dominant and only a minority gain utility from purchases. I infer that a change in consumer mindset results in this transition from M0 to M1, but inference is not central to building my case. In this case, the prices offered move to a wedge in which sellers choose to what extent they will try to wield the power to discriminate, as offered by information asymmetry. In the market M1, a seller risks losing a customer by offering an elevated price as non-haggling buyers are dominant. They reflect demand for purchasing without utility gained from haggling. The dominant consumer type, non-hagglers, will carry their information search and be offered fixed prices within the range y. In the final market stage M2, information asymmetry disappears and the market price settles at P0, the ‘ideal’ equilibrium price. Bargaining disappears from the market. Compared to haggling markets in developing economies, equivalent markets have transitioned to this final stage in developed economies, brought about by what can be hypothesized as a shift in consumer mindset and resolved market imperfections. It remains to be explored what kind of factors result in hagglers evolving into non-hagglers as an economy develops.