retailing-negotiation
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Transcript of retailing-negotiation
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RETAILINGRetailing Format that Involves Price Bargaining between the Buyer and Seller
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• Price negotiation is a common practice in business-to-business market.
• What about in B to C market?
-Housing market
-Automobile market
Price Negotiation
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What are we negotiate for?
The size of the pie in the transaction!
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Where does the Pie Come from?
Buyer’s reservation price: the highest price she is willing to pay for the product.
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Where does the Pie Come from?• Seller’s reservation price: The lowest price the seller is
willing to accept for selling the product.
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Where does the Pie Come from?• The total surplus is the pie that is resulted from the trade!
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A Model: Negotiated Price
The transaction price of brand j purchased by consumer k:
kjljlkjkjljlkj wrwp )(
where kl ~ N(0, ) and
2
22
21
...00
............
0...0
0...0
J
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What decides the total size of the pie?
• From the seller side?
Decrease the cost
• From the buyer side?
Increase the willingness to pay for the product
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Negotiation is to Divide the Pie between the Seller and the Buyer
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What decides on the portion of the pie each party getting?• The bargaining power of the two parties!
• Seller• -Competition• -Inventory• -Quality
• Buyer
-product knowledge
-other options
-demographics (ethnicity, income, education, age, gender)
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An example in the car market
• Individual-level car purchase data in one region of U.S. over a period of a year
• No trade-in, no rebates• Mid-sized sedans, three foreign brands (unique
maker/model/vintage), 85% of the total market
-Brand 1: Share: 81.52%, mean price: $21200
-Brand 2: Share: 7.54%, mean price: $20800
-Brand 3: Share: 11.03%, mean price: $25100• 4795 transactions in the final data set
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An Empirical Application on Transaction Data: Summary Statistics of Explanatory Variables (d)
Mean Std. Dev.
Min Max
Age 42.09 13.06 17.00 92.00
Gender 0.60 0.49 0.00 1.00
Median Household Size 2.92 0.58 1.50 6.00
% of Black 5.93 10.74 0.00 100
% of Hispanic 13 9.67 0.00 55.09
% of Asian 17.58 15.92 0.00 97.30
% of College Graduates 34.04 16.79 0.00 100.00
% of Rural Population 6.07 21.02 0.00 100.00
Median Household Income($100,000)
0.57 0.21 0.12 1.50
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An Empirical Application on Transaction Data: Summary Statistics of Explanatory Variables (d)
Mean Std. Dev. Min Max
Median Value of House ($100,000)
2.54 1.10 0.43 5.00
% of Home Ownership 63.73 23.67 0.69 100.00
% of Executives 17.61 7.59 0.00 57.14
% of Technician 3.34 2.05 0.00 15.55
Finance 0.66 0.47 0.00 1.00
Days to Turn 32.27 41.59 1.00 323.00
Competition (# of dealers within 50 miles of radius)
44.37 19.34 3.00 67.00
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An Empirical Application on Transaction Data: Main Results
Parameter Estimates (γ) Mean Std. Dev
Intercept -0.902* 0.102
Age -0.010* 0.004
Gender (0 for female and 1 for male) -0.036* 0.005
Median Household Size -0.003 0.036
% of Black 0.085* 0.027
% of Hispanic 0.097* 0.026
% of Asian -0.091 0.053
% of College Graduate -0.151* 0.033
% of Rural Population 0.033 0.029
*significant at 5%
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Findings• Older buyers have greater bargaining power than younger
buyers
Reason: could be that older buyers have more experience with buying cars so that they are more efficient in gathering information.
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Findings• Higher educated consumers tend to have a larger
bargaining power• Reason? They tend to have lower search cost due to their
better knowledge about information sources, which can lead to a larger bargaining power
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Findings• Buyers from wealthy neighborhoods (with high value of
houses) and busy buyers (e.g. executives) have low bargaining power.
• Reason? They are likely to have high opportunity costs of searching. Therefore, those buyers tend to have high search costs and low bargaining power against the dealers
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Findings• Female buyers on average have less negotiation power
than male buyers.• Being Black or Hispanic reduces the relative bargaining
power of a buyer
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Findings• Seller’s bargaining power decreases when competition
increases• Seller’s bargaining power decreases when inventory level
increases.
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Take away• Win-win situation • Understand your customers• Choice of location (competition)• Offering of product (alternative options for consumers)
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Final away• The bargaining process may seem to be a waste of time
to people used to just taking items to a cash register, but try to enjoy the process -the key is to try to keep the price low without being arrogant or insulting. Learn to fake astonishment at a suggested price or walk slowly out of a shop if necessary…Above all, keep smiling.
-Lonely Planet: Egypt