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1 Elsevier Editorial System(tm) or International Journal o Researc in Marketing Manuscript Drat Manuscript Number: IJRM-D R2 Title: THE EFFECTS OF A "NO-HAGGLE" CHANNEL ON MARKETING STRATEGIES Article Type: Full Lengt Article Corresponding Autor: Dr. Xiaoua Zeng, Corresponding Autor's Institution: First Autor: Xiaoua Zeng Order o Autors: Xiaoua Zeng; Srabana Dasgupta; Carles B Weinberg Abstract: As sellers increasingly turn to multi-cannel retailing, te opportunity to implement dierent pricing policies as grown. Wit te advent o te internet, many traditionally bargained products suc as automobiles, jewelry, watces, appliances and urniture are now being oered online at a ixed predetermined price. We explore te strategy o simultaneously oering two pricing ormats (ixed and bargained) via two dierent cannels (online and brick and mortar) and ind tat in a market were tere are two types o consumers tose wit a ig cost o aggling and oters wit a lower cost a dual-pricing strategy is optimal only wen tere are enoug ig aggling-cost consumers, but not too many, and wen te aggling costs between te two types o consumers are suiciently dierent. We also ind tat it is optimal or te seller to speciy a iger-tan-cost minimum acceptable price as te price loor o bargaining. By doing so, te seller increases te bargained price by complementing te salesperson's bargaining ability, and also sotens te internal competition between te two cannels. Finally, we ind tat, surprisingly, te dual-pricing strategy may serve ewer customers wile still being more proitable tan a single price structure. Te implications or consumer surplus are also explored. Fortcoming IJRM Volume 31 #4 (2014)

2 THE EFFECTS OF A NO-HAGGLE CHANNEL ON MARKETING STRATEGIES Xiaoua Zeng (corresponding autor) 1 Srabana Dasgupta Carles B. Weinberg ========================================================== ARTICLE INFO Article istory: First received on July 20, 2012 and was under review or 13 monts. ============================================================ ACKNOWLEDGMENTS: Te work described in tis paper was supported by a grant rom te Researc Grants Council o te Hong Kong Special Administrative Region [Grant CityU150309] and a grant rom te Social Sciences and Humanities Researc Council o Canada. Fortcoming IJRM Volume 31 #4 (2014) 1 Xiaoua Zeng is an assistant proessor at te City University o Hong Kong, Hong Kong, Cina (xiaoua.zeng@cityu.edu.k, pone/ax: (+852) /0346); Srabana Dasgupta is an assistant proessor at te Beedie Scool o Business, Simon Fraser University, and Carles B. Weinberg is te Presidents o SME Vancouver Proessor o Marketing at te Sauder Scool o Business, University o Britis Columbia, Vancouver, Canada. 1

3 FINAL APPROVED MANUSCRIPT Click ere to view linked Reerences THE EFFECTS OF A NO-HAGGLE CHANNEL ON MARKETING STRATEGIES Abstract As sellers increasingly turn to multi-cannel retailing, te opportunity to implement dierent pricing policies as grown. Wit te advent o te internet, many traditionally bargained products suc as automobiles, jewelry, watces, appliances and urniture are now being oered online at a ixed pre-determined price. We explore te strategy o simultaneously oering two pricing ormats (ixed and bargained) via two dierent cannels (online and brick and mortar) and ind tat in a market were tere are two types o consumers tose wit a ig cost o aggling and oters wit a lower cost a dual-pricing strategy is optimal only wen tere are enoug ig aggling-cost consumers, but not too many, and wen te aggling costs between te two types o consumers are suiciently dierent. We also ind tat it is optimal or te seller to speciy a iger-tan-cost minimum acceptable price as te price loor o bargaining. By doing so, te seller increases te bargained price by complementing te salesperson s bargaining ability, and also sotens te internal competition between te two cannels. Finally, we ind tat, surprisingly, te dual-pricing strategy may serve ewer customers wile still being more proitable tan a single price structure. Te implications or consumer surplus are also explored. Keywords: cannel relationsips, pricing, bargaining JEL classiication: M31, L11 Fortcoming IJRM Volume 31 #4 (2014)

4 1. Introduction In many markets, bargaining is te norm. In te automobile market, consumers only inrequently pay te sticker price or a car. For products suc as electronics, jewelry and urniture, wile bargaining is not as overt as in te car market, consumers still expect to be able to aggle wit salespeople, eiter directly on te sales price o te product or on service-related costs: cain retailers suc as Best Buy and Sleep Country routinely bargain wit in-store customers by oering tem in-store discounts as well as additional services suc as ree delivery and extended warranties. Wit te advent o te internet and te growing popularity o online buying, owever, many manuacturers and retailers are now oering teir products at ixed prices eiter troug teir own websites or tird party sites, ostensibly addressing some consumers dissatisaction wit bargaining and time spent visiting te pysical store (Business Week 2007). In te automobile market, tird-party websites suc as and te Canadian website allow consumers to obtain price quotes (typically provided by several competing dealers) or te car o teir coice. Consumers simply review te price and, i acceptable, te car is sipped to tem directly. Best Buy and oter large retailers continue to allow bargaining on te sop loor even toug te prices on teir websites are ixed. 1 Hig end stores, suc as Cartier and Zales or jewelry and Etan Allen or urniture, ave recently introduced online sopping tat, like te online auto-buying websites, allow consumers to avoid aggling and visiting te pysical store. In some cultures, suc as in Asia, were aggling is traditional even or small-ticket items including cloting, ood and ome appliances, te growing use o te internet as led to many retailers launcing teir own web-stores or Fortcoming IJRM Volume 31 #4 (2014) 1 According to (o Best Buy) ave goals tat teir teams ave to meet and managers tat manage te slower times ave a arder time o meeting tese goals, tus tey are more willing to negotiate. 1

5 joining online aggregators suc as Taobao (Cina s leader in e-commerce), were typically prices are ixed and cannot be bargained over. Despite te growing opportunity or sellers to use multi-cannel settings to simultaneously implement dierent pricing policies, tere is signiicant variation across and witin industries in te extent to wic tis strategy as been adopted, or wic te extant literature does not provide a satisactory explanation. Tere ave been numerous studies examining a seller s coice between a ixed-price ormat and a bargaining ormat (e.g., Riley and Zeckauser 1983, Wang 1995, Arnold and Lippman 1998), all o wic ocus on a seller s coice o one pricing ormat over anoter and do not consider te possibility tat te seller may want to oer bot simultaneously. In all o tese studies, in coosing a ixed, no-bargain price, a seller must weig te cost o giving up te ability to discriminate troug bargaining in avor o te iger prices it is able to carge consumers wo can no longer aggle. In tese studies, oering a ixed price is an equilibrium strategy under suc conditions as te seller being able to make a credible commitment to a ixed price strategy (Riley and Zeckauser 1983), or te buyers bargaining abilities being, on average, suiciently ig (Arnold and Lippman 1998), or te operating cost o implementing a bargaining strategy being too ig (Wang 1995). Wile tese indings give us some insigts into te beneits o ixed pricing over bargaining, tis is dierent rom a situation were consumers ave te option to coose between te two dierent pricing ormats. As a result, we do not ave a clear understanding o wy and wen a strategy o simultaneously oering bargained and ixed prices is optimal. Our objective is tereore to answer te ollowing questions. Wen is it optimal or a seller to bargain, oer a ixed price, or to use a mix o te two via two dierent cannels and given te optimal coice, wat prices sould te seller set in eac cannel? To answer tese questions, we Fortcoming IJRM Volume 31 #4 (2014) 2

6 develop a model were we diverge rom te existing literature to allow bot pricing ormats (bargained and ixed prices) to be oered simultaneously via a dual distribution system so tat consumers can sel-select into a cannel tat maximizes teir utility. We model te interaction o tree parties: (1) a seller tat can sell via bargaining in a brick and mortar store, or at a ixedprice online, or bot, (2) a salesperson wo bargains over price in te pysical, brick and mortar cannel on beal o te seller, and (3) te consumer wo incurs a aggling cost i se decides to bargain. Tus, we consider tree potential cannel structures: te conventional bargaining cannel tat allows or ace-to-ace aggling wit te consumer (Fig. 1(a)), a dual cannel tat oers consumers a coice between a ixed price and a bargained one (Fig. 1(b)), and a ixedprice-only cannel (Fig. 1(c)). -[Insert Fig. 1 ere]- One distinct eature o our model is tat it allows te salesperson s commission to be based on te dierence between te sales price and a seller determined minimum acceptable price. 2 Tis is in contrast to te existing literature (Basu et al. 1985, Misra et al. 2005) were te commission is based on te dierence between te sales price and te marginal cost o te product. Tus, rater tan imposing te constraint tat te marginal cost o te product represent te lowest price te seller is willing to accept, we treat te bottom line o bargaining as a strategic variable tat may be equal to or iger tan marginal cost. Tis lexibility tat te seller now as in setting te lowest bargaining point or te salesperson serves two purposes: irst, it raises te salesperson s treat point and allows te sales representative to commit to a iger Fortcoming IJRM Volume 31 #4 (2014) 2 Empirical evidence o a minimum acceptable price can be ound in te automobile industry, were te invoice price or veicles eectively plays te role o a minimum acceptable price because consumers typically observe a veicle s invoice price troug websites suc as and te Kelly Blue Book, and tey view tis as te dealer s true cost. In reality, te invoice price is dierent rom te actual cost te dealer incurs. Tis is because o idden incentives oered to te dealer by te manuacturer tat are not relected in te invoice price. Tis includes incentives suc as special allowances, dealer cas, dealer oldback and discounts, all o wic te dealer may coose not to pass on to te consumer (Besanko et al. 2005).. 3

7 price during bargaining (Cai and Cont 2004, Gateouse 2007), and second, it controls te cost inormation on wic te bargaining is based and elps te seller reac a more avorable bargaining outcome (Wilken et al. 2010). Our model yields several interesting indings. First, a dual cannel is optimal i tere are (i) two types o consumers in te market tose wit a ig cost o aggling and tose wit a lower cost and (ii) a ig enoug proportion o ig aggling cost consumers wose cost o aggling is suiciently dierent rom te low aggling cost customers. Second, we ind tat it is optimal or te seller to speciy a iger-tan-cost minimum acceptable price above wic it pays te salesperson a commission. Wile a iger price loor means tat te salesperson ails to reac agreements wit more buyers (e.g., tose wit valuations above marginal cost but below minimum acceptable price), te seller still inds it optimal to do so. Te lower te salesperson s bargaining ability, te greater te seller s incentive to set a iger minimum acceptable price. Te minimum acceptable price also serves to soten te internal competition between te two cannels. Tird, surprisingly, under certain conditions a dual-cannel seller may serve ewer customers wile still making a iger proit tan under a single-cannel structure, i.e., eiter a bargaining-only or ixed-price-only cannel. Tis is because te minimum acceptable price set in a dual cannel is iger, allowing te seller to carge a iger ixed price, wic in turn elps te salesperson acieve a iger price in te bargaining cannel. Finally, we ind tat no one cannel structure is ideal or every customer: te bargaining-only cannel generates te greatest surplus or low aggling-cost and low-valuation consumers, wile te ixed-price-only cannel generates te greatest surplus or ig aggling-cost consumers. Overall, te ixed-price-only cannel generates te igest surplus, te bargaining-only cannel te lowest, wile te dual cannel stands between te two. Fortcoming IJRM Volume 31 #4 (2014) 4

8 Te contribution o our study lies in two domains. First, we contribute to te cannels literature by identiying te conditions under wic we would observe a dual cannel structure in a market were bargaining is te norm. Tis is distinct rom te existing dual-distribution literature were te addition o a cannel does not involve implementing a dierent pricing ormat rom te original cannel (e.g., Moriarty and Moran 1990, Ciang et al. 2003, Kumar and Ruan 2006). A second contribution o our researc is to te pricing and bargaining literature, were we explore a means by wic te seller can limit te reedom o te salesperson in order to inluence te outcome o te bargaining process and consequently soten competition between te two cannels. In tis, our model is similar to tat o Tanassoulis and Gill (2010) wo explore ow limiting te sales person s ability to oer discounts to matcing a rival s posted price can soten competition between sellers leading to iger prices. Instead o price matcing, owever, our model uses a dierent mecanism tat is internal to te seller, namely te imposition o a price loor, to manipulate te outcome o te bargaining between te consumer and te salesperson. Finally, it is important to note tat te role tat te salesperson plays in our model is tat o a price delegate in tat e simply perorms te bargaining on beal o te seller. It is necessary to ave te salesperson in our model or te ollowing reason: te salesperson acts as a commitment device by appropriately designing te delegation contract (i.e., speciying te minimum acceptable price), te seller commits is delegate (te salesperson) to touger negotiations wit te buyer. Tus, our study is also related to te price delegation literature, wic examines delegation contracts ranging rom decisions to give ull pricing autority, limited pricing autority (i.e., pricing latitude was limited to pre-speciied ranges), or no pricing autority (i.e., salesperson is not allowed to deviate rom list prices). Wile most o te studies are concerned Fortcoming IJRM Volume 31 #4 (2014) 5

9 wit designing delegation contracts tat inluence te amount o eort te delegate or sales person makes (Lal 1986, Josep 2001), our ocus is on understanding te role tat te minimum acceptable price plays in inluencing te inal bargaining outcome in a dual cannel context. In order to do tis and to make te analysis tractable we make two simpliying assumptions. First, we assume tat te salesperson is risk neutral and second, we assume tat te seller as complete inormation about te salesperson s capabilities and eort level so tat moral azard and adverse selection problems are abstracted away rom. Tese assumptions allow us to ocus on te issue o alternative pricing strategies and te role o te new instrument, namely te minimum acceptable price, in a multi-cannel context. We discuss te limitations o making tese assumptions in section 4. Te rest o te paper is organized as ollows. In section 2, we develop a model o dual cannels or a monopolist seller. Tis is ollowed by analyses o te model in section 3. Te overall conclusion o our study and directions or uture researc are outlined in section A Model o Dual Cannels In tis section, we discuss te basic setup o a dual-cannel model as sown in Fig. 1(b). Due to space limitations, we omit te discussion o te bargaining-only and ixed-price-only cannels, as tey can be easily derived rom te dual-cannel model. For clarity, Table 1 provides a list o te notations tat we use in te model. -[Insert Table 1 ere]- Fortcoming IJRM Volume 31 #4 (2014) 6

10 2.1. Consumers Let V be consumers valuation o a product (e.g., electronics, car, urniture), wic we assume ollows a uniorm distribution, U (0,1). Consumers can eiter buy te product at a ixed price online, p, or tey can bargain wit te salesperson (in te pysical store) to reac a price, b p, and by doing so, incur a aggling cost, c, tat is incurred rom te time and eort spent in (and te inerent aversion to) negotiation, as well as te time spent visiting te pysical store. Te notion o a aggling cost as been reported in te press (Business Week 2007) and considered in several teoretical studies o bargaining (Desai and Puroit 2004, Terwiesc et al. 2005, Gill and Tanassoulis 2009). Surveys o automobile buyers and buyers o oter consumer products indicate tat as many as two tirds o tem ave a strong aversion to te negotiation process, not only because o te time and eort required, but also because o a ear o being taken advantage o by te salesperson. For simplicity, we assume tat proportion o consumers ave a ig cost o aggling, c, wile te remaining 1 consumers incur a lower cost, c l. We assume tat consumers make decisions using te ollowing steps: irst, tey obtain te ixed price, p, rom te seller s website or a tird-party website. Ten, based on inormation, te consumer estimates te price se expects to pay i se bargains wit te p and oter salesperson. I buying te product troug eiter cannel does not generate suiciently ig Fortcoming IJRM Volume 31 #4 (2014) utility, te consumer opts or an outside option, UC 0. Te outside option can be tougt o as te consumer s status quo, i.e., not buying a new product. Once te consumer as determined b p and, p se computes er utility rom te tree options and cooses te one tat maximizes er utility. We deine te consumer s utility as: 7

11 V p i te product is bougt at te no-aggle ixed price b U V p c i te product is bougt at te bargaining price; c cl, c. (1) UC i te outside option is exercised Note tat te presence o te outside option, U C, allows us to ocus on a single brand wile still ensuring reasonable pricing beavior by te seller. Because our researc ocuses on te vertical relationsip among te seller, salesperson and consumer, tis simpliication seems reasonable Te Salesperson Consumers wo buy rom te bargaining cannel bargain over te price wit a salesperson employed by te seller. As discussed earlier, te salesperson s role is tat o a delegate wo can credibly commit to a mutually agreed price. Since our objective is to understand ow te seller can best design a contract tat can inluence te inal bargaining price, we abstract away rom issues suc as moral azard and adverse selection by assuming te salesperson to be risk neutral and tat te seller as ull inormation. Tis assumption also maintains analytical tractability in our multicannel pricing strategy setting. Te salesperson receives a commission rom te seller (Srinivasan 1981), wic we assume ollows a linear orm: 3 S b b B p V c M dv p V c M dv VFV1 VFV 2 (, ) (1 ) (, l). (2) Te commission rate is denoted by B, and te minimum acceptable price is denoted by Fortcoming IJRM Volume 31 #4 (2014) M. We allow te seller to speciy an M C instead o restricting M C. We also assume tat consumers ave inormation about M but not about C. As equation (5) below sows, te 3 We restrict our attention to a commission-only plan. A more general compensation plan contains a ixed salary and a commission (e.g., Basu et al. 1985). Interestingly, compensation scemes in te automobile industry tend to be eavily dependent on commissions, te salary component being very small (Compensation and Beneits Review, 2004). 8

12 b bargaining price, p, turns out to be a unction o bot consumers valuation and aggling cost. F V1 ( F V 2 ) are te set o valuations o ig aggling-cost consumers (low aggling-cost consumers) wo buy rom te bargaining cannel. As Appendix I sows, FV 1 and FV 2 [ cl M UC,1], tat is, only some low aggling-cost consumers buy rom te bargaining cannel under a dual-cannel and none o te ig aggling-cost consumers do so. is te proportion o ig aggling-cost consumers. Let U S be te salesperson s reservation utility tat e can obtain rom alternative employment. Te salesperson receives a commission i and only i tere is a sale. Tus, or te salesperson to work, we require tat S Determination o te Bargaining Price b Next we outline te way in wic te bargaining price, p, is determined. We ollow te Nas axiomatic approac (Nas 1950, Rot 1979), a bargaining mecanism by wic eac party receives its reservation utility wile any remaining surplus is split depending on te relative bargaining power o te two parties. Tus, te party wit eiter te iger bargaining power or a more appealing outside option, i.e., reservation utility, is able to extract a larger proportion o te total surplus. Besides being widely used by previous researcers (Dukes and Gal-Or 2003, Desai and Puroit 2004, Guo and Iyer 2013) and being a general and intuitive metod by wic to capture te bargaining process, te Nas axiomatic approac also allows us to incorporate competition between te two cannels in a straigtorward manner, someting tat could become quite intractable wit an alternative approac (suc as Rubinstein s (1982) sequential bargaining model). Fortcoming IJRM Volume 31 #4 (2014) Let be te salesperson s bargaining power relative to te consumer, were (0,1). Te Nas solution to te bargaining process maximizes te ollowing expression: U S 9

13 Max V p c D B p M D (3) b 1 b [ C] [ ( ) S]. b b V p c and B( p M ) represent te consumer s and salesperson s respective gains rom te transaction. D C and D S are te utilities or te consumer and te salesperson, respectively, rom teir best alternative in case o a disagreement. Te bargainers will reac an agreement i and only i it makes bot parties better o, i.e., b b V p c D C and B( p M ) D S. For te salesperson, we assume tat DS 0, as e makes no money i no agreement is reaced in te bargaining. Note tat M determines te disagreement point o bargaining because once te price is below M, bargaining breaks down. Te consumer, owever, can eiter buy rom te ixed-price cannel at p or resort to er outside option, U C, depending on wic alternative generates a iger surplus, i.e., D max V p, U. (4) C Intuitively, i negotiations are unsuccessul, equation (4) implies tat consumers wit a ig valuation would preer to buy rom te ixed-price cannel, wile low-valuation consumers would coose teir outside option, U C. We assume tat consumer caracteristics { V, c } are known to te salesperson. Ten, depending on te consumer s best alternative, te bargaining price takes te ollowing orm: 2.4. Te Seller p b ( p c) (1 ) M i p UC V 1 ( V c U ) (1 ) M i c U + M V p U Fortcoming IJRM Volume 31 #4 (2014) C C C C Te objective o a dual-cannel seller is to maximize te joint proit rom te two cannels. (5) by setting (i) te no-aggle ixed price, p, and (ii) te salesperson s commission rate B and 10

14 minimum acceptable price M, wic determine te price bargained in te bargaining cannel, b p. Formally, te seller s optimal decision will be a solution to te ollowing problem: D b b S S Max ( p C) q p ( V, c ) C dv (1 ) p ( V, c ) C dv s.t. U. VFV1 VFV 2 ( p, B, M ) were C is te seller s marginal cost, cannel (as a unction o l (6) S q is te number o units sold in te ixed-price p and M), and te constraint represents te act tat te seller must guarantee te salesperson is minimum payo, U S. 3. Analyses and Results We begin te analysis by solving or te conditions under wic a dual cannel as positive sales in bot cannels. I bot cannels are available but one o tem as zero sales, we consider it to be a single-cannel structure. We ten derive te optimal minimum acceptable price or te salesperson and ollow tis wit a series o results related to te seller s pricing strategy, including a comparison o bargaining and ixed prices, bot witin and across cannel structures. Finally, we present results or demand, cannel proitability and consumer surplus. For clarity, we identiy te decisions under dierent cannel structures by adding a corresponding subscript, suc as M, M, etc. Witout loss o generality, we set dual bargaining only consumers outside option, U C, and te low aggling cost, c l, to be zero. Tese assumptions Fortcoming IJRM Volume 31 #4 (2014) simply scale te solutions but do not cange our conclusions. We also conine our analysis to te case were c 1 C because, i c 1 C, none o te ig aggling-cost consumers will buy te product in te bargaining cannel even at its cost, C, wic is an uninteresting case. Te complete analytical solutions or eac cannel structure are provided in Appendix II. 11

15 3.1. Case were Dual Cannel Has Positive Sales in Bot Cannels As sown in Appendix I, or bot te ixed-price cannel and bargaining cannel to ave positive sales, two conditions must be satisied: (a) two types o consumers exist, i.e., 0 1, and (b) te dierence in aggling costs needs to be suiciently ig, c p M c. l dual dual Table 2 illustrates te market segments or eac cannel, conditional on a given ixed price and minimum acceptable price. -[Insert Table 2 ere] Optimal Minimum Acceptable Price or te Salesperson Equation (2) describes te salesperson s problem, wic is a unction o a commission rate, B, and te minimum acceptable price, M. Since te role o B as been studied extensively in te salesorce literature (e.g., Basu et al. 1985, Lal and Srinivasan 1993, Cen 2005), our major empasis is on understanding ow te seller sets M. Unlike te previous literature wic assumes tat te salesperson s commission pay is contracted on te seller s true marginal cost, C, in our model (consistent wit certain eatures o te auto market) M does not necessarily ave to be equal to C, and tereore serves as an additional instrument or te seller over B. Te optimal minimum acceptable price or te salesperson is described in te ollowing proposition (see proo in Appendix III): PROPOSITION 1(a). Under bot te bargaining-only cannel and te dual cannel, it is optimal or te seller to speciy a minimum acceptable price tat is greater tan te marginal cost, i.e., M C. Fortcoming IJRM Volume 31 #4 (2014) Te intuition beind tis is as ollows: Te minimum acceptable price, M, serves as te salesperson s treat point or te price loor or bargaining, so tat a iger M, according to b equation (5), acieves a iger bargained price, p. In tis way, a iger M complements te 12

16 salesperson s bargaining skill by resulting in a iger bargaining price. Tis can be seen rom te expressions ( Mbargaining only C) 0 and ( Mdual C) 0. Tus, te lower te salesperson s bargaining power, te greater te seller s incentive to set a iger M to acieve a iger bargaining price. In a dual cannel, te minimum acceptable price as a urter strategic role. To see tis we irst state te ollowing proposition: PROPOSITION 1(b). Te minimum acceptable price in a dual cannel is iger tan tat in a bargaining-only cannel. Wen te seller oers two cannels, tere is internal competition between tem, as all consumers will be aware o te price in te ixed price cannel. To accommodate te no-aggle ixed-price cannel, te seller needs to prevent te price in te bargaining cannel rom being too low and does so by speciying an M tat is iger tan tat under a bargaining-only cannel. A iger M eectively increases te bargaining price, so as to lessen te price pressure on te ixed-price cannel. In oter words, M serves to soten te internal competition between te two cannels Bargaining and Fixed Prices In tis subsection, we derive te optimal ixed and bargaining prices in te dual cannel and ten compare tem to te prices set in te bargaining-only and ixed-price-only cannel structures. We begin by asking weter, in a dual cannel, te ixed price is iger or lower tan te bargaining prices. We answer tis wit te ollowing proposition: PROPOSITION 2. Under a dual-cannel strategy, te no-aggle ixed price is iger tan te price bargained in te bargaining cannel. Fortcoming IJRM Volume 31 #4 (2014) 13

17 Te intuition or tis is airly straigtorward and can be derived directly rom te consumer s utility unction in equation (1): Since consumers incur a aggling cost wen tey bargain, or tem to buy in te bargaining cannel instead o te ixed-price cannel, te bargained price must be lower tan te ixed price. In oter words, since te ixed price saves consumers time and eort, tey are willing to pay a premium or tis. Next, we compare te dispersion o bargained prices under te dual cannel to tat in te bargaining-only cannel. We measure dispersion as being te dierence between te lowest and igest bargained prices. Te dispersion tereore relects te extent to wic sellers are pricediscriminating amongst consumers. We present te ollowing proposition (see Appendix IV or proo): PROPOSITION 3. Te dispersion o bargaining prices under a dual cannel is lower tan tat in a bargaining-only cannel. Tere are two reasons or tis. First, te lowest bargaining price in a dual cannel is iger tan tat in a bargaining-only cannel, as te dual-cannel seller sets a iger minimum acceptable price (Proposition 1(b)). Second, te igest bargaining price in a dual cannel is lower tan tat in a bargaining-only cannel because in a bargaining-only cannel, consumers wit dierent valuations are carged dierent prices, wile in te dual cannel consumers wose valuation exceeds te no-aggle ixed price can cite tat price wen bargaining wit te salesperson to obtain a lower price. As a result, tey pay less tan tey would ave ad te ixedprice alternative not existed. Empirical evidence supporting tis as been ound in te auto industry by Zettelmeyer, Scott Morton and Silva-risso (2006), wo sow tat buyers wo used te ixed-price option (e.g., price quote rom internet reerral services) tended to pay lower prices or teir cars tan tose wo did not use it. Fortcoming IJRM Volume 31 #4 (2014) 14

18 Finally, we compare te no-aggle ixed price in a dual cannel wit tat in a ixed-priceonly cannel. We present te ollowing proposition: PROPOSITION 4. Te ixed price in te dual cannel is iger tan tat in te ixed-priceonly cannel. Te intuition or tis is as ollows: As low aggling-cost consumers do not beneit as muc rom te ixed price as do ig aggling-cost consumers, te ixed-price-only cannel carges a price tat is low enoug to attract bot types o consumers. In contrast, te dual cannel serves te segments via dierent cannels and can price more eiciently. Tat is, as only te ig aggling-cost consumers will buy at te ixed price, te dual-cannel seller is able to carge a iger price tan te ixed-price-only seller. Furtermore, te dual-cannel seller as an additional incentive to set a iger ixed price because te iger ixed price also increases bargained prices in te bargaining cannel. To see b wy, consider equation (5): te bargained price, p, is non-decreasing in p. Tis is because as p increases, te outside opportunity or certain consumers becomes less attractive, making tem more dependent on te bargained outcome. Te salesperson can take advantage o tem and acieve a iger price Demand Next we compare te optimal demand levels across all tree cannel structures. We put Fortcoming IJRM Volume 31 #4 (2014) orward te ollowing proposition (see Appendix VI or proo): PROPOSITION 5. Wen M C and wen eac cannel operates optimally, te dual cannel does not necessarily generate iger demand tan a single-cannel structure. 4 4 In some cases, despite te lower demand, te dual cannel will earn a iger proit tan te single cannel. We discuss tis in subsection

19 Speciically, wen te ig aggling cost is below a certain level, i.e., c (1 C), (1 ) 2 and M is a decision variable so tat te seller will coose M demand in te dual cannel is lower tan in te bargaining-only cannel. C at te optimum, ten te To illustrate tis proposition more clearly, we present te ollowing numerical examples. In Table 3(a) and 3(b), we compute te demand levels in eac o te tree cannel structures wile we vary and c. -[Insert Table 3 ere]- For oter variables in tis and all subsequent numerical analysis or proitability and consumer surplus, we set 0.5 (i.e., te consumer and salesperson ave equal bargaining power), C 0.8 and U To make te numerical analysis easy to understand, we multiply all monetary amounts by $20,000. S Te dual cannel versus te bargaining-only cannel ( M C). As sown in Table 3(a), wen 0.55, te total demand in te bargaining-only cannel (0.110) is greater tan tat in te dual cannel (0.106). Altoug generating iger demand is one rationale or wy a seller may sell its products troug multiple cannels (Geyskens et al. 2002), or a certain mix o te two types o consumers ( 0.55 in our numerical example), demand in te dual cannel is actually lower tan tat in te bargaining-only cannel. Tis can be explained i we understand Fortcoming IJRM Volume 31 #4 (2014) ow demand rom te two types o consumers is generated. First, te dual-cannel seller will always sell to ewer low aggling-cost consumers tan te bargaining-only seller. Tis is because, according to Proposition 1(b), a dual-cannel seller will speciy a iger M tan will a bargaining-only cannel seller. Second, te dual-cannel seller may or may not sell to more ig aggling-cost consumers tan its bargaining-only counterpart, depending on te proportion o 16

20 ig aggling-cost consumers,. Wen is low (i.e., te proportion o low aggling-cost consumers is ig), te dual-cannel seller will ave an incentive to carge a iger ixed price, even i it entails sacriicing some demand, as it allows te seller to carge a iger price in te bargaining cannel. Anoter actor tat contributes to te dierences in demand between te bargaining-only and dual cannel is te ig aggling cost, c. As sown in Table 3(b), wen c 0.05, te total demand in te dual cannel is lower tan tat in te bargaining-only cannel. Tis is because as c decreases, te bargaining-only cannel seller as a greater incentive to serve ig agglingcost customers, as it requires less to compensate tem or teir aggling costs. However, i c or is not too low i.e., as sown in Table 3(a), wen c and 0.35 or 0.55, or wen, as sown in Table 3(b), c or 0.05 and 0.75 ten despite te lower demand, te proit in te dual cannel is iger tan tat in te bargaining-only cannel. Tis is because te dual-cannel seller is able to raise te ixed price, wic in turn increases prices in te bargaining cannel, tus compensating or te lower demand. Te dual cannel versus te bargaining-only cannel ( M C). Allowing te seller to set M C is important or deriving Proposition 5. Wen M is ixed, i.e., M C, ten te total demand in te dual cannel is never lower tan demand in te bargaining-only cannel (see proo in Appendix VI). Fortcoming IJRM Volume 31 #4 (2014) Te dual cannel versus te ixed-price-only cannel. We start by noting tat demand in te ixed-price-only cannel is independent o te values o eiter or c. Tis is because consumers do not aggle, so tat aggling costs do not inluence te seller s decision and consumers coices. According to Tables 3(a) and 3(b), demand in te dual cannel is iger 17

21 tan tat in te ixed-price-only cannel in most cases, except or a very low value o ig aggling costs, c Proitability In tis subsection, we compare proits across te tree dierent cannel structures in order to determine te optimal conditions or a particular cannel structure. We ind tat, as in te case o demand, aggling costs are critical in determining te relative proitability o eac cannel. Te expressions or proits rom eac cannel structure are derived in Appendix II. However, due to te complexity o tese expressions, we are unable to directly compare proits in closed orm. Instead, we do so using a numerical procedure. Speciically, we vary te values o, c and cl in order to capture te mix o ig and low aggling-cost consumers and te dierences in teir aggling costs. For te oter parameters, we kept te same set o values as in te demand analyses (i.e., 0.5, C 0.8 and U ; canging tese values will sit te proit S numbers but te comparison across te tree cannel structures ollows te same pattern.) We start by varying te proportion o ig aggling-cost consumers,, te eect o wic is sown in Fig. 2(a). We ollow tis wit an analysis o te impact o eterogeneity in aggling costs, c c, wic is sown in Fig. 2(b). It is important to note tat we vary c c, wile l maintaining te same average aggling cost, i.e., ( c c ) 2, trougout. Tis allows us to capture variation in eterogeneity alone and prevents it rom being conounded wit any canges Fortcoming IJRM Volume 31 #4 (2014) in te average aggling cost in te market. To acilitate te interpretation, we represent te eterogeneity as a raction o te average aggling cost, i.e., c c / ( c c ) / 2 -[Insert Fig. 2 ere]- l. l l Te indings rom our numerical analysis lead to te ollowing proposition: l 18

22 PROPOSITION 6. Te dual cannel is te most proitable structure wen (a) tere are enoug ig aggling-cost consumers but not too many, and (b) wen te dierence in aggling costs between te two types o consumers is suiciently ig. According to Proposition 6, two actors are critical in determining te proitability o te dual cannel. First, or te dual cannel to be optimal, a certain mix o te two types o consumers is required. For example, i all or nearly all te consumers are ig aggling-cost consumers, it is best or te seller to serve consumers only wit a ixed price, as te beneits rom price discrimination troug bargaining are outweiged by te costs o compensating consumers or teir aggling costs. In te context o our numerical example, tis need or some but not too many ig aggling-cost consumers implies tat Second, or te dual-cannel to be optimal it is also required tat tere be suicient eterogeneity in aggling costs. Our numerical analysis sows tat wen te eterogeneity in aggling costs 143%, a dual-cannel strategy is optimal. Alternatively, wen tere is insuicient eterogeneity (i.e., <143%), te dual cannel is never optimal. In oter words, te act tat consumers are dierentiated ( 0 ) does not ensure te optimality o using dual cannels because, irst, altoug tis dual-cannel structure allows te seller to discriminate consumers based on teir aggling costs, te ixed-price cannel eliminates te seller s ability to discriminate based on consumer valuations, someting tat is possible in a bargaining-only Fortcoming IJRM Volume 31 #4 (2014) cannel structure. Second, te presence o te ixed-price cannel impacts te price bargained in te bargaining cannel because it serves as an outside option, resulting in a lower price to some ig-valuation consumers tan would ave been oered i te no-aggle option were absent. Tese two disadvantages o te ixed-price cannel can be mitigated, owever, i te ixed price 19

23 is suiciently ig, wic is possible only i some consumers ave suiciently iger aggling costs tan oters Consumer Surplus We conclude tis section wit an examination o consumer surplus under te tree cannel structures, wic we also analyze using a numerical approac. We irst analyze te surplus at individual consumer level because eac consumer s surplus depends on er valuation and aggling cost. Figs. 3(a) and 3(b) demonstrate ow te surplus is distributed among dierent consumers. -[Insert Fig. 3 ere]- We ind tat no single cannel structure generates te igest level o consumer surplus or all consumers. Speciically, or low aggling-cost consumers wit relatively low valuations (ranging rom $17,100 to $18,580 in Fig. 3(a)), te bargaining-only cannel generates te igest surplus. Tis is because in te dual cannel, due to a iger minimum acceptable price (Proposition 1(b)), bargained prices or tese consumers are iger. For low aggling-cost consumers wit ig valuations ( > $18,580), te dual cannel oers te igest consumer surplus, as te presence o te ixed price allows tese consumers to bargain a better price. For ig aggling-cost consumers, te ixed-price-only cannel generates te igest surplus (Fig. 3(b)), as its use o a ixed price ormat allows tese consumers to skip te costly bargaining process. Wile tis is also true or te dual cannel, te price paid by tese consumers is iger due to te seller s need to soten te internal competition between te two cannels (Proposition 4). Fig. 3(c) summarizes te overall consumer surplus rom te tree cannels. Te ixed-priceonly cannel generates te igest surplus; te bargaining-only cannel, wile most commonly Fortcoming IJRM Volume 31 #4 (2014) 20

24 used in practice, generates te lowest surplus in most cases; and te dual cannel stands in between. Te ixed-price-only cannel beneits consumers in two ways. First, te ixed price prevents te seller rom engaging in price discrimination among consumers, wic beneits, in particular, ig-valuation consumers. Second and more importantly, te ixed-price-only cannel eliminates te aggling costs tat consumers incur wen bargaining in te bargaining cannel. Te act tat te ixed-price-only cannel generates te igest surplus among all cannel structures is a somewat surprising inding, as it seems to contradict te act tat a number o regulatory agencies and consumer groups ave argued tat a ixed-price policy works against consumer interests, at least in te auto industry (e.g., Competition Bureau o Canada 2003, Automobile Consumer Coalition o Canada 2006). However, it is important to note tat our results do not imply tat all consumers will be better o wen prices are ixed. Instead, we claim tat only consumers wit certain caracteristics beneit rom it, i.e., low aggling-cost consumers are still better o i tey bargain over prices, weter it is te bargaining-only structure or te dual cannel. Neverteless, our results suggest tat a ixed-price policy is valuable as a wole, as it eliminates consumer aggling costs and limits te ability o sellers to price-discriminate among consumers. 4. Summary and Conclusions Te conventional wisdom in setting prices is tat a seller is better o i it is able to pricediscriminate among consumers, using mecanisms suc as bargaining. Oering a ixed price at te same time appears to reduce te advantage o price discrimination because buyers know te maximum price tat can be carged. As a result, te recent emergence o a no-aggle, ixed price Fortcoming IJRM Volume 31 #4 (2014) 21

25 in markets tat ave traditionally relied on bargaining cannot be satisactorily explained. Our researc attempts to explain tis penomenon. In particular, we explore te strategic implications o oering consumers te coice between bargaining a price and accepting a ixed, no-aggle price troug suc cannels as te internet. We compare te proitability o tree cannel structures (bargaining only, ixed-price only and a dual-cannel structure). Our indings suggest tat consumer aggling cost plays a critical role in determining wen a particular cannel structure is optimal. We ind tat a dual cannel is not always optimal: wen eiter ig or low aggling-cost consumers account or a large proportion o te population, or wen tey do not ave very dierent aggling costs, a single cannel is optimal. Our conclusions provide guidance to sellers: no one strategy is always te best, as optimization depends upon te magnitude and dispersion o aggling costs, wic in turn may be related to suc actors as customer bargaining experience, income and time constraints. More broadly, we ind tat wen individual-level price discrimination imposes a cost on consumers, as does aggling, it is not always optimal to use tat strategy, as consumers attempt to oset tat cost by seeking to pay a lower monetary price to te seller. Airlines and oter industries tat use yield-maximization strategies to cange prices dynamically may ind tat customers, in turn, seek compensation or te time tey spend searcing or te best price by demanding a lower price tan i prices were ixed over time. As te development o new tecnologies enables sellers to more easily reac customers via multiple cannels, allowing dierent pricing policies across cannels, te coice o pricing ormats emerges as a strategic consideration or sellers. Our indings generate implications or sellers deciding wat pricing ormat(s) to implement. Fortcoming IJRM Volume 31 #4 (2014) 22

26 Furter, we examine te impact o a rarely considered strategic variable, namely te minimum acceptable price, to te pricing and cannels literature. We sow tat te seller may not ind it optimal to set te commission based on te true marginal cost o te product. Instead, te seller may be better o by speciying a iger-tan-cost minimum acceptable price as te price loor o bargaining. Te minimum acceptable price as important implications or bot te bargained and no-aggle price in tat it aects te outcome o te bargaining. It also leads to cases were te dual cannel is more proitable but does not generate iger demand tan a single-cannel structure. A limitation o our analyses is tat, we ave not considered te cases in wic te salesperson is risk averse and te seller as incomplete inormation. Tese actors can play a role in determining te conditions under wic dierent pricing strategies are optimal and te optimal minimum acceptable price. First, increasing risk aversion may reduce a participant's sare in te bargaining outcome and increases tat o is opponent (Kilstrom et al. 1981, Osborne 1985, Rot 1989). Tis is because te more risk-averse participant is relatively more eager to minimize te risk o breakdown. Tis is exploited by te less risk-averse participant and e or se demands a larger sare o te net surplus. Tereore, wen te salesperson is more risk averse, we predict tat te seller will set a iger price loor to raise te salesperson s treat point. Second, i te seller does not observe te salesperson s eorts and te cost o eort, te contract needs to provide incentives or te salesperson to exert te proper level o eort and to reveal is true type. I a salesperson as ig cost o eort, e as a disadvantage in bargaining and tus te seller can set a iger minimum acceptable price. In contrast, or a salesperson wit lower cost o eort, iger minimum acceptable is less necessary; rater, a iger commission rate can motivate im to exercise is greater bargaining power (Cai and Cont 2004). Tereore, Fortcoming IJRM Volume 31 #4 (2014) 23

27 te seller sould provide a menu o contracts, suc tat te iger cost o eort te salesperson as, te iger te minimum acceptable price and te lower te commission rate. In sort, in te presence o risk aversion and inormation asymmetry, we predict tat te seller still sets a igertan-cost minimum acceptable price in most cases but te optimal level may vary. Wit respect to te optimal cannel structure, we believe tat our main results remain qualitatively te same, tat is, te optimal condition or te dual-cannel is tat consumers are suiciently eterogeneous in teir aggling costs. However, as risk aversion o te salesperson and te seller s inormation disadvantage imply a iger operating cost in te aggling cannel, te cuto o consumer eterogeneity may sit. Future researc sould examine tese issues in more details. Fortcoming IJRM Volume 31 #4 (2014) 24

28 Fig. 1 Tree Cannel Structures Seller Seller Seller Salesperson Consumers (a) Bargainingonly (Fixed price) Consumers (b) Dual-cannel Salesperson (Fixed price) Consumers (c) Fixed-priceonly Fortcoming IJRM Volume 31 #4 (2014) 25

29 Fig. 2 Proit Comparison across Tree Cannels dual bargaining-only ixed-price-only dual bargaining-only ixed-price-only proit ($) proportion o ig aggling cost consumers (β) proit ($) eterogeneity o aggling cost (c -c l )/[(c +c l )/2] (a) varies, c 0.07, cl 0 (b) 0.5, bot c and c c 0.07 l c l vary wile Fortcoming IJRM Volume 31 #4 (2014) 26

30 Fig. 3 Consumer Surplus 2,000 1,800 dual bargaining-only ixed-price-only 2,000 1,800 dual bargaining-only ixed-price-only 1,600 1,600 surplus ($) 1,400 1,200 1, ,000 18,000 19,000 20,000 consumer valuation (V) (a) Low Haggling-cost Consumers surplus ($) surplus ($) 1,400 1,200 1, ( 0.5, c 0.07, c 0 ) proportion o ig aggling cost consumers (β) 0 17,000 18,000 19,000 20,000 consumer valuation (V) (b) Hig Haggling-cost Consumers l dual bargaining-only ixed-price-only Fortcoming IJRM Volume 31 #4 (2014) (c) Total Consumer Surplus ( varies, c 0.07, c 0 ) l 27

31 Table 1. Model Notation Notation Explanation p No-aggle ixed price b p Bargained price M Minimum acceptable price B Salesperson s commission rate, 0B 1 C Te seller s true cost o te veicle q Unit sales in te ixed-price cannel U Salesperson s outside option, U 0 S Salesperson s bargaining power, 0,1 V Consumer s valuation o te product, V U 0,1 c Consumer s aggling cost, c c, c S, were c c 1 C Te proportion o ig aggling-cost consumers, were 0 1 U C Consumer s outside option, UC 0 l Fortcoming IJRM Volume 31 #4 (2014) l 28

32 Table 2. Market Segmentation or te Tree Cannel Structures Dual cannel ( cl M p c M ) Consumer Caracteristics V, c Coice c c V [ p U C,1] Buy in te ixed-price cannel V [0, p U C ) Outside option V c M U,1 Buy in te bargaining cannel c c l l C V 0, c M U Outside option l C I p c M, te cannel structure becomes a bargaining-only cannel Consumer Caracteristics V, c Coice V c M U,1 Buy in te bargaining cannel c c C 0, C c c l l C,1 0, V c M U Outside option V c M U Buy in te bargaining cannel V c M U Outside option l C I p cl M, te cannel structure becomes a ixed-price-only cannel Consumer Caracteristics V, c Coice c { c l, c } V [ p U C,1] Buy in te ixed-price cannel V [0, p U C ) Outside option Fortcoming IJRM Volume 31 #4 (2014) 29

33 Dual Bargaining-only Fixed-price-only Dual Bargaining-only Fixed-price-only Table 3. Demand Comparison Total demand Demand rom c l consumers Demand rom c consumers M $17,529 $17,333 $17,333 $17,333 p $18,829 $18,634 $18,340 $18,154 dual $234 $219 $209 $203 Total demand Demand rom c l consumers Demand rom c consumers M $17,268 $17,182 $17,095 $17,008 bargaining only $242 $212 $183 $154 Total demand p $18,000 $18,000 $18,000 $18,000 ixed price only $200 $200 $200 $200 (a) varies, c c Total demand Demand rom c l consumers Demand rom c consumers M $17,675 $17,431 $17,333 $17,334 p $18,075 $18,131 $18,154 $18,154 dual $202 $203 $203 $203 Total demand Demand rom c l consumers Demand rom c consumers Fortcoming IJRM Volume 31 #4 (2014) M $17,233 $17,158 $17,083 $17,008 bargaining only $227 $200 $176 $154 Total demand p $18,000 $18,000 $18,000 $18,000 ixed price only $200 $200 $200 $200 (b) c varies,