Bargaining and Posted Prices: What Does the Internet Change?

Abstract

The Internet has introduced a variety of online buying services that expand the reach of sellers and reduce search costs for buyers. In markets in which traditional outlets tend to establish prices through bargaining, these online intermediaries have also altered the price setting process. Perhaps the most well known example is Autobytel.com which provides referral services in the automobile market. By using Autobytel, a buyer can obtain a posted price as an alternative to bargaining with a car dealer ship. To understand the effect of online referral systems on the price setting process, we construct a theoretical model of oligopolistic price competition in which one dealership has an exclusive contract with a referral intermediary. We show that posted prices offered through the referral system are not necessarily lower than offline prices (bargained prices). Our model provides theoretical insights relevant to results in the empirical literature addressing the role that Autobytel and other infomediaries play in online markets.