Blogs | November 25, 2011

Why are some nations more inclined to bargain?

Tolga asks: Why are people in some nations more inclined to bargaining?

Ian answers: When I think of bargaining, an image springs to mind of a shopper buying food, clothes or other items in a market, haggling to get a cheaper deal. It happens in other situations as well – formal house price negotiations are an example. But bargaining does seem to be more prevalent in some cultures.

This can become obvious when a tourist wanders into a market in different country to strike a deal under local conditions. And even at home, there may be more bargaining than you first think, once you stop to look for it.

Time is money
When first considering how to answer your question, I thought we might need to enlist the help of an anthropologist. Economists have been known to turn to these specialists to help explain why people behave as they do. Indeed, one of the most prominent journalists at the Financial Times, Gillian Tett, trained as an anthropologist. However, as I do not have the skills of an anthropologist, it would be better to restrict myself to economics. 

The straight economics answer to why people in some nations are more inclined to bargain may be that actually doing the bargaining takes time. And time is money. In countries where people are paid higher hourly wages, it may not be worth taking the time to haggle. Advertising and research in-store and online provides information needed to compare prices between retailers to, usually, get a reasonable price.

But that straight economics answer leaves me cold. Some questions remain unanswered. Even in wealthier countries, there are open-air markets and clear evidence of bargaining. There are also some goods and services that people bargain for regularly. Motorists rarely buy a car for the price shown on the windscreen, for example, so haggling is both acceptable and expected.

Market forces
The economist John List – who, by the way, has a webpage with entertaining cartoons that illustrate his areas of academic interest – studied buyers and sellers in open-air markets in the United States and found a variety of behaviours from sellers. Among his findings was a difference in the starting price of a market negotiation depending on how well dressed a person was, their ethnicity, whether the market was busy and the time of day.

eZonomics summarised the 2009 paper soon after it was released and suggested it may pay to dress down and go to markets on busy days. The research shows that, even in wealthier countries, bargaining happens, but perhaps not as obviously as elsewhere.

For travellers, research into local customs can pay dividends. We’ve written about Yale political science and economics assistant professor Chris Blattman’s experience negotiating fares for unmetered taxis in Ethiopia's capital city Addis Abeba. He describes a “national bargaining fraction” that indicates the typical price movement when haggling, which varies from place to place.

Knowledge is power
A fascinating anecdote emerged in a speech by then UK Financial Services Authority chairman Howard Davies in 2001. Davies said people would negotiate over half a tank of fuel being included in the sale of a car – then accept a financial deal to buy the vehicle that could easily be bettered by going elsewhere. Davies also cited US research suggesting that “a family on average incomes could easily save about five percent of their net income by managing their finances more effectively”.

The tale of the car buyers illustrates that people are more inclined to bargain on products that they know about. Arguably, they had a good idea of how much they should pay for the car but little information about interest rates and other financial terms. Knowledge is critical when bargaining.

Is cheaper best?
My most recent bargaining experience involved the renewal of my car insurance contract. In this case, I embraced technology and used an online price comparison site to research, with the possibility of going back to my original supplier to ask them to match a lower price. The process took my spare time over several days, so some people might find that the opportunity cost is too high and the convenience of a simple policy renewal wins out over the prospect of getting a lower price.

It is also important to note that cheaper is not always the best in these circumstances.

A lot of my time was spent closely reading the proposed contracts noting both the fine as well as the large print. Unlike bargaining for a car or for jewellery in a bazaar, it tends to be much more difficult to compare financial products.

One of the lessons to be learnt is that effective bargaining requires knowledge no matter where in the world you are. So to get the best deal on taxi fares, market stall vegetables, financial products or other items and make your bargaining worthwhile, spend some time researching what you expect to pay. And learn from those car buyers who put too much focus on a tank of gas at the expense of their wider financial situation.

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Ian Bright
Ian Bright

Senior economist at ING
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