Sunday, December 2, 2012

The art of negotiating

Good morning economists. A couple of days ago, I was watching an episode of "Dealers" where different people are trying to sell their family heirlooms or artifacts to five dealers from all over the world. The seller negotiates with the five dealers and each dealer makes his or her own offer. The seller can choose to sell the item or reject the bids. Although this is not really strange, I was surprised by the asking price and the negotiated price. I have seen items that the seller was asking $10.000 for, negotiated down to $3.500. And that was not just an isolated example. In fact in most of the episodes I have watched so far, the dealers make an offer below 50% of the seller's asking price.

In the end, only a handful of people agree to the exchange. The question is why are they prepared to discount their asking price by so much? The obvious answer is that they need the money, but there is another reason as well!
 (An example of a buyers' market. Firms hire labor at a given wage rate on a take it or leave it basis.)

"Dealers" is an example of a buyers' market, a situation where the buyer is the one who is really setting the price. Anything above that price will not be sold. But what is really interesting to see in this micro market, is the effect of information on the negotiated price. Each dealer is specializing in a particular item. Thus the seller is unable to lie or trick the dealers in paying for an overvalued item.

This is something that can be observed on a larger scale in everyday life as well. Sellers know that buyers will be more informed when making a purchase during times of economic contraction. As such this is reflected in the discounted prices they offer their products for in order to make them more attractive.

Have a great "offer" day!

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