Possibly‐Final Offers

Nolan H. Miller, Nikita E. Piankov and Richard Zeckhauser

Journal of Economics & Management Strategy, 2006, vol. 15, issue 3, 789-819

Abstract: A price‐setting seller faces a buyer with unknown reservation value. We show that if the buyer is sufficiently risk averse, the seller can benefit from employing a Possibly‐Final Offer (PFO) strategy. In a PFO, if the buyer rejects the seller's initial offer the seller sometimes terminates the interaction. If the seller does not terminate, he follows up with a subsequent, more attractive offer. As the buyer's risk aversion increases, the seller's expected profit under the optimal PFO approaches the full‐information profit. These results extend to contexts with endogenous commitment, multiple types of buyers, multidimensional objects, and nonseparable utility functions.

Date: 2006
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