Fixed vs. Flexible Pricing in a Competitive Market

We study the selection and dynamics of two popular pricing policies— …xed price and ‡exible price— in competitive markets. Our paper extends previous work in marketing, e.g. Desai and Purohit (2004) by focusing on decentralized markets with a dynamic and fully competitive framework while also considering possible non-economic aspects of bargaining. We construct and analyze a competitive search model which allows us to endogenize the expected demand depending on pricing rules and posted prices. Our analysis reveals that …xed and ‡exible pricing policies generally coexist in the same marketplace, and each policy comes with its own list price and customer demographics. More speci…cally, if customers dislike haggling, then …xed pricing emerges as the unique equilibrium, but if customers get some additional satisfaction from the bargaining process, then both policies are o¤ered, and the unique equilibrium exhibits full segmentation: Haggler customers avoid …xed-price …rms and exclusively shop at ‡exible …rms whereas non-haggler customers do the opposite. We also …nd that prices increase in customer satisfaction, implying that sellers take advantage of the positive utility enjoyed by hagglers in the form of higher prices. Finally, considering the presence of seasonal cycles in most markets, we analyze a scenario where market demand goes through periodic ups and downs and …nd that equilibrium prices remain mostly stable despite signi…cant ‡uctuations in demand. This …nding suggests a plausible competition-based explanation for the stability of prices.