The costs in bargaining online

People love a good bargain. When business transactions move online, the bargaining continues on e-commerce platforms such as Carousell, eBay and Taobao.

But buyers may not know that there are costs to that bargaining. These costs include taking the effort to initiate the bargaining process. When bargaining fails, buyers also incur a “loss-of-face” cost.

In a study I did with researchers from London Business School and Ross School of Business, we find that the average bargaining initiation costs for Chinese buyers range from 3 to 16 yuan (about S$0.63-$3.37) across provinces in China.We draw the findings from analysing Taobao data as well as a survey with Chinese consumers on their bargaining intentions.

It turns out that your bargaining costs are related to where you live. The more developed the province, the higher the average bargaining costs. This is understandable, because buyers in more developed provinces value their time more.

The negotiation between online buyers and sellers is similar to a chess game. Each makes a move while anticipating the other’s next move. But we find that there seems to be some factors or certain scenarios, behind a buyer’s bargaining success. This happens when the buyer is a repeat customer, when the product at hand has a high price but a promotion is not available, and when the seller has a lower reputation compared to other sellers. These scenarios increase the buyer’s bargaining chips. When used wisely, they help the buyer to make a compelling bid for more discounts.

A seasoned buyer will be happy to know that more experienced buyers indeed enjoy a larger chance of bargaining success, i.e., they are more likely to get a discount. However, there is a limit to that success—the size of the discount is not any larger than that of an inexperienced buyer.

The cost for “loss-of-face”

Regardless of their experience, buyers can still face another type of cost in bargaining—the cost for loss-of-face when the bargaining fails. This is determined by how much extra a consumer will pay for the same product to Seller B, after a failed bargaining attempt with Seller A. Here, we see a wide range of attitudes. About 60 per cent of respondents viewed their loss-of-face cost to be less than one yuan. Yet, for 10 per cent of consumers,their loss-of-face cost could be as high as 100 yuan.

Needless to say, consumers with lower loss-of-face costs are more likely to still buy from the same seller even though their bargaining failed. In fact,after a failed attempt,those whose loss-of-face costs are in the bottom 10 percentile are almost three times more likely to make the purchase than those in the top 10 percentile.

Considering these bargaining costs that buyers incur, we investigated whether a ban on bargaining would benefit them. We compared calculations where bargaining was allowed or banned, and found that the ban would benefit buyers and the e-commerce platform greatly, while benefitting the sellers slightly.This was because the bargaining costs for buyers had disappeared. Without the need to leave room for bargaining, sellers’ average posted price decreased by 1.1 per cent. Buyers benefitted from the lower price and the platform also saw more transactions. The sellers saw a higher customer conversion rate, but it was only a modest 0.7 percent.

As shopping platforms proliferate, discerning buyers would do well to compare the pricing mechanisms for each platform. It also pays to bear in mind those hidden bargaining costs.