Do Buyer-Size Discounts Depend on the Curvature of the Surplus Function? Experimental Tests of Bargaining Models

A number of recent theoretical papers have shown that for buyer-size discounts to emerge in a bargaining model, the total surplus function over which parties bargain must have certain nonlinearities. We test the theory in an experimental setting in which a seller bargains with a number of buyers of different sizes. We generate nonlinearities in the surplus function by varying the shape of the seller’s cost function. Our results strongly support the theory. As predicted, large-buyer discounts emerge only in the case of increasing marginal cost, corresponding to a concave surplus function. JEL Codes: C78, C90, L25. Acknowledgments: We are grateful to Roman Inderst and seminar participants at University College London and Tilburg University for helpful comments, to Urs Fischbacher for providing us with his z-Tree software, and to Brian Wallace for writing the computer code used in our experiments. We also wish to thank the Nuffield Foundation (Grant SGS/00767) for funding this research. Contact Information: Normann: Department of Economics, Royal Holloway, University of London, Egham Surrey, TW20 0EX, United Kingdom. E-mail: [email protected]. Ruffle: Department of Economics, Ben-Gurion University, Beer Sheva 84105, Israel. E-mail: [email protected]. Currently on leave at Harvard Business School, Boston MA 02163, USA. E-mail: [email protected]. Snyder: Department of Economics, George Washington University, 2201 G Street N.W., Washington DC 20052, USA. E-mail: [email protected]. Currently on leave at University of Chicago, Graduate School of Business, 1101 East 58th Street, Chicago IL 60637. E-mail: [email protected].