Selcuk, Cemil and Gokpinar, Bilal (2023): Why Fixed-Price Policy Prevails: The Effect of Trade Frictions and Competition.
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Abstract
Fixed-price selling is common in today's markets. While previous research in marketing and economics literatures provide several intuitive reasons for the emergence of fixed-price selling (e.g. clarity and simplicity of managing the fixed-price process, reduced coordination and information costs) our study offers an entirely different rationale---based on market competition and trade frictions---that explains the prevalence of fixed-price selling. Using a market equilibrium approach, and employing a novel competitive search framework to account for a fully competitive and dynamic market, we offer a new and micro-founded account for the widespread use of fixed pricing policy. Considering three important market characteristics---customer risk aversion, the degree of trade frictions and the level of market competition---we explore the strategic choice between the fixed-price, best-offer, and over-the-sticker pricing policies. Unlike the standard models in the literature, which are based Hotelling, Cournot, Bertrand frameworks, the competitive search framework enables us to model competition with a large number of buyers and sellers, and to vary the degree of competition accordingly. We find that fixed pricing emerges as the unique or the de-facto selling rule in most parameter regions. Indeed, the only region where haggling matters is the case in which customers are risk neutral and trade frictions are significant and market competition is moderate.
Item Type: | MPRA Paper |
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Original Title: | Why Fixed-Price Policy Prevails: The Effect of Trade Frictions and Competition |
Language: | English |
Keywords: | fixed-price selling, haggling, risk aversion, trade friction, competition |
Subjects: | D - Microeconomics > D4 - Market Structure, Pricing, and Design > D40 - General |
Item ID: | 117287 |
Depositing User: | Cemil Selcuk |
Date Deposited: | 15 May 2023 14:28 |
Last Modified: | 15 May 2023 14:28 |
References: | Baye, M. R., Kovenock, D. and de Vries, C. G.: 1992, It takes two to tango: Equilibria in a model of sales, Games and Economic Behavior 4(4), 493�510. Bester, H.: 1993, Bargaining versus price competition in markets with quality uncertainty, The American Economic Review 83(1), 278�288. Bitran, G. and Caldentey, R.: 2003, Commissioned paper: An overview of pricing models for revenue management, Manufacturing & Service Operations Management 5(3), 203�229. Burdett, K. and Judd, K.: 1983, Equilibrium price dispersion, Econometrica pp. 955�969. Burdett, K., Shi, S. and Wright, R.: 2001, Pricing and matching with frictions, Journal of Political Economy 109(5), 1060�1085. |
URI: | https://mpra.ub.uni-muenchen.de/id/eprint/117287 |