Coming from a community famous for being penny-pinchers (read: baniya), haggling was a part of my upbringing and a matter of self-worth. It was a Microeconomics lecture on monopoly and price differentiation that made me realise that the benefits may have a wider scope. Before we begin, here's an optional note on surplus to help you get aquainted with the concept. The inference is intuitive so even if you skip this bit, you're good to go.
Economic Principle of Surplus
Every consumer has a maximum price that they're willing to pay for a particular good or service, called the reservation price. Every producer has a minimum price that he's willing to accept for that good or service as well. The difference between the maximum a consumer can pay and the minimum a producer will accept leads to the concept of a surplus.
There are two parts of surplus:
Consumer surplus - The difference between the maximum price a consumer is willing to pay and the price actually paid by him/her
Producer Surplus - The difference between the actual price paid by the consumer and the minimum price that the producer was willing to accept
The Economics Behind Haggling
In case there is a fixed price and there's no scope for bargaining or haggling, the consumer's decision is binary - to buy or not to buy, since the consumer is a price taker. However, when the price isn't fixed, there's a third option, to negotiate for a lower price. This means that a consumer who previously would've chosen to walk away because of a fixed price tag, might actually put in the effort to haggle to get the seller to accept a price equal to, or less than his/her reservation price in case the price offered in the market was higher than his/her reservation price.
From an economic standpoint, this could lead to increase in sale quantity for the seller, and as long as the lowered price finally agreed upon is higher than the minimum price that the seller was willing to accept, there's additional surplus that might have been lost if there was fixed pricing. While the profit from this additional sale is lesser, it is still an increment over the seller's previous profit, thus increasing producer surplus.
The Psychology Behind Haggling
The act of haggling involves time and effort on the part of both, the buyer and the seller. Although economically, all time wasted on the haggling is a sunk cost and therefore shouldn't be a part of future decision making, psychologically, there's a feeling of loss in case there's no positive outcome despite spending time on haggling. Therefore, there are chances that a prospective buyer might end up deciding to increase his initial reservation price, thus increasing consumer surplus. This could be because of one or a combination of the following reasons:
Realisation that something is better than nothing especially after already having spent time bargaining
Sense of embarrassment and social awkwardness about leaving the transaction midway
Feeling of guilt about having taken a lot of the seller's time
Feeling of personal satisfaction, or "victory" at having secured a good deal
Potential Applications
While small traders keep alive the tradition of bargaining, the trend is non-existent in "big stores" or those with automatic invoicing through a POS software. However, technology should extend human capabilities, not restrict them.
Understandably, no customer would ever tell you, "Hey, this is the maximum I'm willing to pay for this product". But, the advances in technology can help brands get close to that number. Tracking a customer throughout the purchase cycle through site or app behaviour, using cookies to see the behaviour such as duration of stay on the product page, scroll length, actions undertaken and then mapping them to price of the product could enable the business intelligence to provide personalised pricing. Similar to the physical haggling, this could prevent a customer who was walking away, to reconsider.
Bidding is one of the best ways to get customers to reveal their true reservation prices. Ebay bidding is commonly known but a form of differentiated pricing is also practiced by online content providers such as Mashable. Mashable offers courses on a Pay What You Want model, on which there have been certain researches proving that these yield higher profits over fixed prices. However, going from an MRP model to a bidding or a PWYW model has its own set of implications and considerations.
Engaging in actual haggling might damage a brand's reputation, bring down its quality perception and actually just prove uneconomical. But, it is undeniable that better knowledge of reservation price can enable customisation of product offering and therefore, the pricing. Brands should consider coming up with a way to enable further price differentiation to extract more of the surplus from the market and find better ways of gauging a consumer's reservation price and finding ways to increase that reservation price.
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