Ambiguity aversion
2008-05-13 · Original WordPress address
Will Wilkinson is back from Turkey and it doesn't look like he had a good time (something to do with goat rodeos). Apparently, like most places that aren't here, retail prices in Turkey aren't posted. Instead there's an expectation that buyer and seller will negotiate a deal.
Will suggests the equilibrium quantity is less under "haggling" than under Walmart-like posted pricing. His argument is that buyers don't exactly know their value of the good in question, posted prices are information about the buyer's own value of that good and, given ambiguity aversion, the haggling system reduces quantity.
Clearly, people are uncertain about the value of goods to them and because they don't have the good yet, they're uncertain about their uncertainty (i.e. the probability they'll have positive surplus from buying the good is unknown). Lots of economists believe people have ambiguity aversion and given how much attention the theorists are given it these days, I assume its grounded in some serious results in psychology ((or more likely the math is neat)).
Its not so clear that a posted price would help the buyer reduce his ambiguity, though. Post bargaining, the price is not uncertain, so the remaining (post bargaining, pre purchase) ambiguity is the same under both pricing systems. Its not clear, then, why posted prices would reduce ambiguity.
Maybe Will is thinking that the transaction costs under haggling systems are higher and this would imply lower equilibrium quantity. But what was all that about asymmetric information and uncertainty about surplus?
I think Will's on to something. Especially if we lived in a culture that made haggling into sport and we actually got enjoyment out of participating in it, but in any case, those transaction costs wouldn't be that large... Maybe some micro dude(tte) will pick this up and run with it?