Strategic Communication Before Price Haggling: A Tale of Two Orientations

Liang Guo ()
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Liang Guo: CUHK Business School, Chinese University of Hong Kong, Shatin, Hong Kong, China

Marketing Science, 2022, vol. 41, issue 5, 922-940

Abstract: Sellers may display unreasonably high prices (in high-cost oriented contexts) that are never accepted or would surely be discounted through bilateral bargaining. Conversely, general or vague prices with incredible appeals may be advertised (in low-cost oriented settings) as a range or for a category but not tied to specific items. Nevertheless, these seemingly irrelevant or unbinding prices can affect buyer behavior and bargaining outcome. This paper presents a new explanation for these puzzling phenomena. We propose that advertised reference prices can be a strategic tool to communicate privately known seller costs to influence optimal buyer strategy to search value information. We show that cheap-talk communication via uncommitted prices can be endogenously credible, because optimal buyer search strategy can be imperfectly aligned with seller preference. In particular, a high-cost seller may prefer the buyer to acquire information in a more cautious manner (i.e., less willing to stop at good news but more eager to quit at bad news) than a low-cost seller, which may coincide with the buyer’s optimal search strategy. We demonstrate that endogenous buyer search can serve as a two-way discipline to regulate both high-cost and low-cost sellers’ incentives for deception, which thus can sustain credible communication for high-cost and/or low-cost oriented settings.

Keywords: bargaining; cheap talk; information acquisition; MSRP; negotiation; reference price; strategic communication (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormksc:v:41:y:2022:i:5:p:922-940

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