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Abstract

The culture of private negotiation leads parties to agreements below a price that anchors beginning bids and offers. Possible anchors are a list price or suggested retail price. The anchor may be endogenous, e.g., the average reported trade price from previous trading activity. An endogenous anchor may cause a downward or upward drift in negotiated prices. Using bilateral bargaining data from laboratory experimental markets, this paper demonstrates how price information reports create drifts in negotiated prices. A downward drift is robust and causes sharp declines in total market surplus. Also, relative earnings are distributed toward buyers and away from sellers.

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