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a blog from young economists at Nova SBE

Discrimination through bargaining

When you go to a flea market, ask the price of something you like, let’s say a scarf, have you ever thought that if it was someone else asking for the price of the exact same scarf the answer given by the seller could be different? Wouldn’t it be perfect for a seller if he could guess exactly how much each costumer is willing to pay for the good he is selling and being able to charge it,?

Perfect price discrimination is this: “Each unit of the good is sold to the individual who values it most highly, at the maximum price that the individual is willing to pay for it.” 

In the “real world”, we have examples everywhere of different types of price discrimination: the discounts for students in different services, the sales in a clothes’ shop in the end of the season and the different fares for flights offered by the Airline companies. These are examples of ways that a seller/service provider can charge a higher price to a consumer who is more eager to buy, but also sell it to the consumer that only buys it at a lower price.

The act of bargaining in a flea market or in a regular market in some countries is the closest real example I find for perfect price discrimination. The seller sets his/her initial price, which can vary depending on how the consumer looks like (foreigner or local, young or old, etc.), and which is always higher than the value he is willing to sell for. The consumer has two options: Pay the price he/she is asked for, which will give the seller a high margin of profit and at the same time satisfaction to the consumer; Or he/she can try to hassle to get a lower price. The seller will always try to sell the same good at the highest price possible, and generally the consumer will try to reach the price that will satisfy him. Of course when referring to “eagerness to pay” it is not only a question of income, it has also a lot to do with the level of utility one gets from the product, the urgency one has in having it and also to how stubborn and persistent that one can be.

Bargaining is a lot more than doing business, it’s a psychological game in which, on the contrary to what us, regular buyers, may think after getting a scarf in India for half its initial price, the seller always “wins”. The question is how high was its margin of profit.

 

Margarida Ortigão #647

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Author: studentnovasbe

Master student in Nova Sbe

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