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Why Fixed-Price Policy Prevails: The Effect of Trade Frictions and Competition

Cemil Selcuk

No E2023/18, Cardiff Economics Working Papers from Cardiff University, Cardiff Business School, Economics Section

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 fiixed-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

Keywords: fixed-price selling; haggling; risk aversion; trade friction; competition (search for similar items in EconPapers)
Pages: 46 pages
Date: 2023-05
New Economics Papers: this item is included in nep-com and nep-mst
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