Does Bargaining Increase Product Valuation? The Upside of Bargaining Costs

A consumer's cost of bargaining, which is typically assumed to be exogeneously determined, lowers the available surplus and can lead to a negotiation impasse. In this paper, we allow for the possibility that a seller, by managing his own response time, can influence a consumer's bargaining costs thereby changing the consumer's valuation of the product. In a set of laboratory experiments, we find evidence that relative to fixed pricing, bargaining can result in an increase in product valuation, independent of the distribution of bargaining power. The increase in valuation from bargaining also persists under the widely prevalent hybrid pricing mechanism where the seller posts a fixed price and the consumer decides whether or not to negotiate. We find that the increase in valuation is driven by the seller's response time, and that this positive effect stems from the consumer's susceptibility to sunk cost fallacy as opposed to cognitive dissonance. The results provide evidence that a seller can benefit from manipulating a consumer's bargaining costs by strategically taking longer to respond to the buyer's offers or counter-offers. Based on a calibration exercise, we find that depending on the average bargaining power and the seller's costs, between 21% and 39% of the increase in profits under bargaining can be attributed to an increase in product valuation, independent of any price discrimination benefits. We discuss the implications of these findings for researchers as well as practitioners.