Essays on Stochastic Bargaining and Label Informativeness

Many firms rely on salespersons to communicate with prospective customers. Such person-to-person interaction allows for two-way discovery of product fit and flexibility on price, which are particularly important for business-to-business transactions. In the first chapter, I model the sales process as a game in which a buyer and a seller discover their match sequentially while bargaining for price. The match between the product's attributes and the buyer's needs is revealed gradually over time. The seller can make price offers without commitment, and the buyer decides whether to accept or wait. Players incur flow costs and can leave at any moment. The discovery process creates a hold-up problem for the buyer that causes him to leave too early and results in inefficient no-trades. This can be alleviated by the use of a list price that puts an upper bound on the seller's offers. A lower list price encourages the buyer to stay while reducing the seller's bargaining power. But in equilibrium the players always reach agreement at a discounted price. The model thus provides a novel rationale for the pattern of ``list price - discount'' observed in sales. I examine whether the seller should commit to a fixed price or allow bargaining. When the seller's flow cost is high relative to the buyer's, both players are willing to participate in discovery if and only if bargaining is allowed. In such a case, bargaining leads to a Pareto improvement, which explains the prevalent use of bargaining in sales. If the buyer has private information on his outside option, the model predicts that, counter-intuitively, the buyer with a higher net value for the product pays a lower price. The chapter expands the bargaining literature by adding a discovery process that introduces a hold-up problem as well as making the product value stochastic./nThe second chapter examines how counter-offers affects the hold-up problem in stochastic bargaining. Firms increasingly rely on collaboration for the development and marketing of products. The expected surplus from such collaboration can change stochastically over time due to evolving market conditions or the arrival of new information. For collaboration to happen, both firms have to agree to collaborate as well as agree on how the profit is to be split. In such cases, at what point do firms form the alliance and how do they agree on the profit split? To answer these questions, I study a model of bilateral bargaining with a surplus that follows a Brownian motion. One firm can make repeated-offers to the other, and they switch roles after some time to allow for counteroffers. The frequency of counteroffers determines relative bargaining power, and the model captures different bargaining procedures by varying this frequency. The chapter shows that, when there is no outside option, firms collaborate after efficient delay. If there is a relevant outside option, the outcome is inefficient due to the existence of a hold-up problem faced by the weaker party. Firms form the alliance too early, taking the outside options too early, and the ex-ante probability of alliance becomes sub-optimal. Increasing the frequency of counteroffers improves social efficiency by balancing bargaining power and reducing the severity of hold-up. Furthermore, bargaining with more frequent counteroffers can lead to Pareto improvements; the proposer benefits, too, because the increased efficiency outweighs losses in bargaining power. The essay makes a step in understanding the effect of bargaining procedures on collaborative outcome, and shows how collaborators should (not) bargain./nThe third chapter studies the effect of product labelling on consumer behavior empirically. Cigarettes are sold in different strengths, commonly categorized as regular, light, or ultralight. In 2009, Congress passed Tobacco Control Act (TCA) which banned tobacco companies from communicating product strengths to consumers on any marketing or packaging materials. Cigarette companies continue to sell products of different strengths by using less informative color codes, i.e., relabeling Marlboro Light to Marlboro Gold or Camel Light to Camel Blue. Brands do not use the exact same color codes, creating room for confusion. This chapter investigates the effect of such change in label informativeness on consumer choice. Using a panel of smokers from 2007 to 2012, I find a sharp decline in price sensitivity after Tobacco Control Act was passed. The finding is robust in choice models that account for preference heterogeneity, state dependence, price endogeneity, and consideration sets. This result suggests that consumers perceive products as more differentiated when strength labels change to color codes. This essay provides new evidence on the linkage between product labeling and choice behavior.

Advisor: Villas-Boas, J. Miguel