Driving a Hard Bargain
Driving a Hard Bargain
Are hagglers being rational, or just cheap?
Recently, there was discourse over a Tiktok (common genre these days) of a white tourist haggling with a vendor at a market in a South Asian country. People were genuinely mad about it, but it did make me wonder: does haggling make economic sense? And why do people do it? Is it advantageous for tourists?
The price isn’t right
… despite what all the books and courses that advise you on it might say, behind every sales negotiation are two relatively fragile human egos.
Let’s start with the basics: what’s haggling? Generally, it means negotiating a price for a product. It’s not especially common in the “West” (I’m including like, Latin America here) outside of specific contexts (used cars), but it is fairly usual in the Middle East and parts of Asia. The gist of it is that both parties are trying to make the most money off the transaction.
This is a fairly Micro 101 way of thinking about a transaction, though with some caveats. Given the initial endowments of money (for the buyer) and “stuff” (for the seller), and given their preferences, there can be one or more combinations of prices and quantities that satisfy both parties. Normally, assumptions are made that simplify the process, which has only one combination that is optimal for both. These assumptions are usually very stylized, and normally involve mathematical factors. Simplified, the outcome is that, based on their initial endowments and how strongly they feel about the transaction, they can reach a series of deals (or no deal) to satisfy each party’s preferences.
One factor that can play in this process is bargaining: people having to negotiate towards the price they ultimately settle on. Individuals come to the table with preferences and constraints (most notably time and money) and have to balance their desire to come to a deal with their interest in that deal being as favorable to them as possible - if the terms are mostly money, as with haggling, this manifests as reaching the lowest possible price (for the buyer) that is also acceptable to the seller. Agreements may actually be impossible without certain “smoothing” frictions: differences in information (especially about other prices), differences in patience and/or willingness to spend time haggling, and money. Besides these, one final item people in bargains consider is fairness: experiments show that people find that bargains that are mutually beneficial, but “unfair” (as in, skewed to one party) are unacceptable, at least when the stakes are below a given level.
Anyways, back to haggling. The key question is that there’s, roughly speaking, two core principles: that only one customer be allowed to haggle at a given time (though many can observe - sometimes, bystanders chiming in can even lead to fistfights, at the extreme), and that, within the range of acceptable price-quantity combinations, skill in haggling can result in better outcomes for either party. The prices that pairs of hagglers can reach are in the general environ of the traditional “econ 101” equilibrium price, but the mark-up can go somewhat lower or somewhat higher depending on the skill and bargaining power of the customer - factors such as alternative prices, quality of the product, or quantity to be purchased (all of which are mentioned in most guides to haggling) can influence the negotiation.
While haggling is usually associated with a search for lower prices, that’s not always the case. In many cases, consumers haggle as a way to get a sense of accomplishment (due to achieving a lower price), because they enjoy “winning” the negotiation, or simply due to belonging to some group that values haggling. In this sense, interestingly enough, men tend to achieve worse outcomes at haggling than women, because women tend to accrue information about the products, while men tend to act with much more interest in negotiating the purchase than in actually making it.
One final remark is that allowing haggling in transactions might actually benefit the consumer, both in the sense of lower prices but also in better conditions for the sale - particularly for repeat customers, who might be rewarded for their “loyalty”. However, this might also represent a premium for convenience of purchase, since haggling is mentally taxing and time consuming. Additionally, given standardized purchases and products, it wouldn’t make sense to just not offer a single price to all consumers.
Diversity, Equity, and Inclusion
Interestingly enough, while haggling is associated with lower income nations and the peasant economy, this is not universal to either those countries or everyone who lives in them. In that sense, Jamaica, for instance, has little to no haggling culture for the upper and aspirational middle classes, while lower income groups tend to haggle more frequently.
The reason for this is quite simple: haggling might also work as a way to price discriminate based on willingness to haggle. Normally, by “price discrimination” (topic included in not just one but two previous posts) we mean charging different prices to different people. The key to understanding discrimination is that consumers each have a preference over how much to pay for any given product. If those prices can be grouped to different types of individuals, then they can also be charged differently more effectively.
The most imaginary type of price discrimination is first degree discrimination, or perfect price discrimination, which would take place by having the seller know the preference for prices of each consumer, and charge each of them exactly that price up to the point where it stops making a profit. There are very few plausible examples of this, but one might be a therapist that raises or lowers how much they charge based on each patient’s economic situation (my micro 101 professor said he sometimes inserted fake information into his sessions to pay lower rates).
A second type of price discrimination is third degree price discrimination, where the groups of consumers with similar-ish willingness to pay are identifiable by the seller “from the outside”. A very illustrative example are discounts for seniors or students: since seniors have a really high elasticity of demand (i.e. they have nothing else to do), and students have very limited income, it’s generally considered that they should be charged less than full-price, since they would simply not purchase the good or service.
The last type of price discrimination, and the most relevant one, is second degree price discrimination. In it, rather than being able to tell which group of consumers each person in question belongs to, the seller offers different types of arrangements of prices and quantities, which are designed to make consumers sort themselves into the most appropriate one. A very simple example here is quantity discounts: consumers that purchase more items might be increasingly sensitive to prices (which is caused by a cognitive bias known as loss aversion, sort of).
The crucial issue for second degree price discrimination is that the “package” it offers to consumers, known as a bundle, has to meet two conditions: firstly, it has to be attractive for anyone to buy it (known as participation). Secondly, it has to be attractive to each type of consumer in particular, so that they actually want to buy the one that suits them best (aka, incentive compatibility). For example, if the quantity discounts are after two items, people might overbuy unless the discount is very small - meaning that the store would run out. In this sense, most Western societies simply don’t meet the participation constraint, because incomes might be too high for everyday purchases to be worth it. However, as seen in the Jamaican example, not everyone has incentives to participate even when it does lower prices - it might send a negative signal about one’s status. Thus, sellers in haggling markets might benefit from developing a “radar” for who wants and doesn’t want to haggle, and how good at it they might be - and charge haggler types less than non haggler types (with some performance, of course, for entertainment purposes).
Conclusion
So haggling is interesting economically, and people do it mainly (but not exclusively) to save money, but they might not be very effective at it beyond the baseline.
The interesting question is why people think it’s unfair for tourists to haggle, and it came up (sort of) during the Taylor Swift ticket controversy: prices are lower in lower income countries, due to the Penn Effect, which makes haggling doubly advantageous for tourists. The reasons for the price discrepancy are interesting on their own, but in general, it’s caused by higher wages in productive sectors pushing wages up, thus raising the price of all goods on account of the more expensive labor involved. And while a tourist buying a cheaper product from a peasant seller might be mutually beneficial, it’s also a no-no to act “unfairly” - a low stakes version of the ultimatum game.