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Haggling and Prices: Who Knew?

Written by Gary North on March 5, 2016

It is naught, it is naught, saith the buyer: but when he is gone his way, then he boasteth (Prov. 20:14).

Long before the days of King Solomon, face-to-face bargainers were crying the blues to each other. “You can’t expect me to pay that much. Why, I’ve seen it for half that price in Damascus!” The obvious answer, of course, would have been this: “Then why didn’t you buy it in Damascus?”

Why all the haggling? Because of ignorance. The seller of item A does not know how much buyer B is willing to pay. Similarly, buyer B does not know how much seller A is willing to accept. So the two of them negotiate. Each one wants the other to pay more; each one wants to pay less. They haggle. Selling prices get lower; buying offers get higher.

What the textbook example does not always make clear is that both people are buyers and sellers. Usually, the seller is identified as the person who is offering a product or service for sale. The buyer is the person who is offering money. But both of them are buyers. The “seller” is a buyer of money; the “buyer” is a seller of money.

There are some people who love to haggle. There are some cultures that are filled with such people. The Middle Eastern cultures are famous for bazaars and haggling. Western cultures are less haggling-oriented. People understand that there are discounts available for volume purchases, but for individual sales, they do not expect discounts. They do not ask for them.

For example, all stores sell items for cash. Most of them sell the same items at the same price for credit card purchases. All credit card firms charge the stores a fee of a few percentage points per sale: possibly 3%. So, the average store-owner is just as well off selling an item for cash at the net price he would otherwise receive for a credit card sale. Some states have laws requiring retail stores to make this discount available to buyers who pay cash. But very few buyers know this, few clerks know this, and the time and embarrassment value is high enough so that few buyers ever ask tor the discount. Westerners usually prefer not to haggle.

The Time-Price Trade-Off

Are Westerners foolish? Are they too squeamish to become good business people? Not necessarily. They understand at least something about the value of their time. They know that bargaining takes time. The money saved from bargaining face to face may not be worth the potential savings. It is faster just to pay retail and leave.

Furthermore, the existence of a developed free market, with its system of full-scale advertising, has enabled buyers to know the price of many alternatives. Where advertising is legal and unrestricted, price cutting becomes a way of life. Specialized mail-order catalogues offer discounts on many products that sell for more in a local retail outlet. Supermarkets and superstores like Wal-Mart have drastically restructured local retailing. They are to retailing what McDonald’s is to the restaurant industry. These high-volume retail outlets are places where profit margins per sale are very thin. If a buyer finds something he wants in one of these outlets, he knows that he is unlikely to find it cheaper elsewhere. it pays him to buy without spending a lot of time comparing prices, if he knows the product he wants.

When we go to the check-out counter, we do not haggle with the sales clerk. The clerk is probably using a computerized scanner. There is no way for him to reprogram the computer to change prices on an individual sale basis at the check-out counter. The clerk’s scanner reads the universal product code on the item, matches this digitized symbol with a store price, and records the sale. There is no room for haggling. Everything in these stores hinges on maintaining volume sales; getting you through that line fast is part of this sales strategy.

If you want a salesperson to tell you the details of some product, you have to go to a no-discount store. Prices are higher in these stores, but service is presumably better. You can get more “free” information there. There are some people who will take up a local retailer’s time and then buy the item from a discount store, but most people sense that this is not quite fair. There is always some slack in the system, of course, for both buyer and seller. The retailer may be wilting to take less for a big-ticket purchase, especially for cash. The buyer has to ask, however, and he may have to tell the seller that he knows he can buy for less locally. Similarly, a shopper might ask a few questions, but not take up very much of the salesman’s time, or not take him away from another customer, and then buy from a discount catalogue.

The market system allows for such “haggling at the margin.” Most people do not set out to cheat the other person, so the market system can tolerate a few cost-cutters. Like those “eat all you can” restaurants that take occasional losses from gluttons or visiting football teams, they still survive on meeting the average eater’s capacities.

Shopping around is not a zero-price endeavor. It is a form of investment. We search out information and. pay for our trouble. We may find that all our time is sometimes wasted; we might have done better just by buying the item we wanted at the first price offered. But we can’t be sure. in short, buyers are confronted with zones of ignorance. This is why there is still haggling. But this haggling is not always face-to-face and personal; it is becoming increasingly impersonal. It is based on buyers’ evaluation guides, specialized catalogues, telephone calls, and time.

The more expensive the item, and the less common the price information on alternatives, the larger the expected benefit from haggling, whether face to face or computerized. The real estate market is the premier example; so is the used car market. Hamburgers are not worth arguing about.


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