Price Caps

Walking near the Hagia Sophia in Istanbul a few years back, I decided to haggle with one of the many locals peddling fez-like hats. As I recall, the initial quoted price was somewhere around $10, but after a few moments of tense negotiation I had whittled down the price to about $3-4 and made the purchase. Feeling quite satisfied with myself—especially since I am not one who suffers hagglers gladly—I went on my merry way, cap on head. When I ran into someone else I knew wearing a similar cap later that day, I, confident in my newfound prowess, asked him how much he had paid for his hat. As he answered that he had paid half of what I did, the smug swirling about me quickly wafted away, and I ruefully realized that I had been gotten the best of.

But had I been, well, had? The transaction after all was voluntary, so unless I had not been of sound mind, I wouldn't have bought the hat unless I thought its value to me was higher than the cost. Thus, even the discovery that a better deal could have been made didn't alter that I was better off than I would have been sans fez. Nonetheless, I couldn't help being in a minor funk because I realized someone else had gotten a better value than I had.

Sportin' fezessess in Istanbul.

I suspect that in non-haggle societies, we often forget that there is always a range of prices each of us is willing to pay for a given good, despite there being only one price tag. I might be willing to pay up to $15 for a widget, for instance, while you are willing to pay up to $20. If the price were $10 we would both buy, but I'd have a consumer surplus of $5 while you'd have twice that. You've benefited more than I have, but I don't get upset in this case because I have no idea what your maximum willingness to pay is and indeed probably assume it's the same as mine. Thus, I don't worry about it and am content only in the knowledge that I am better off.

Having one non-negotiable price may be good for convenience, but it doesn't change the fact that individual consumers will still benefit to varying degrees from a given item, just as would happen in a tagless bazaar. Haggling can also make prices less "sticky" than they would be otherwise, meaning that they better reflect market conditions.

Interestingly, haggling in the West is becoming more commonplace with the economy's downturn. Consumers are beginning to tease out the lowest price for which sellers will sell by asking for freebies or perks. To some extent this is nothing new, however, and is actually the result of firms finding clever ways to engage in price discrimination. More on that in a future post.