Reference Dependent Prices in Bargaining: An Experimental Examination of Precise First Offers

Erik Kimbrough, David Porter and Mark Schneider
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Mark Schneider: University of Alabama

Working Papers from Chapman University, Economic Science Institute

Abstract: Evidence from psychology and marketing suggests that those who make a "precise" first offer in bargaining get a better deal than those who make a "round" first offer. We report on a series of experiments designed to test for and improve our understanding of the "precise first offer" (PFO) effect in bargaining and whether it likely reflects rational optimizing or equilibrium behavior. Our experimental treatments vary whether decisions are incentivized and whether the PFO effect can emerge as an equilibrium of a cheap-talk signaling game. We find evidence of a PFO effect when subjects read a vignette and make unincentivized individual decisions. When monetary incentives are added to the vignette, we still find the PFO effect, but it is not robust. In a bilateral bargaining situation with a cheap-talk equilibrium, we can not find the PFO effect, which is inconsistent with the equilibrium predictions. Moreover, the PFO effect reemerges in a setting in which initial offers are generated by a random device and thus provides a strong refutation of the signaling model. Our evidence suggests that optimizing and equilibrium accounts of the PFO effect are inadequate. Understanding initial offers as reference points, which subtly change perceptions about the kinds of acceptable counteroffers, provides a plausible account of a new finding on which prior explanations are silent: precise offers induce more precise counteroffers.

Keywords: bargaining; precise first offers; reference points (search for similar items in EconPapers)
JEL-codes: C7 C9 D9 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-exp and nep-gth
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https://digitalcommons.chapman.edu/esi_working_papers/337/

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Journal Article: Reference dependent prices in bargaining: An experimental examination of precise first offers (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:chu:wpaper:20-42

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