A dynamic model of asymmetric price negotiation

Many buyer-seller interactions are characterized by asymmetric negotiation in which the seller makes explicit offers that the buyer either accepts or rejects. Asymmetric negotiations are prevalent in situations where the buyer is either reluctant or unable to make an explicit counteroffer. A common constraint that buyers face during negotiation is a purchase deadline, which causes the buyer's opportunity cost of delay (negotiation cost) to increase over time. In turn, an increasing negotiation cost causes the buyer's minimum purchase threshold (reservation value) to vary over time. This dissertation proposes a new model of asymmetric price negotiation that allows buyers' reservation values to change over time. The model reflects buyer decisions with respect to negotiation costs, the seller's offer rate, a discount rate, and time.; A dynamic structural model of asymmetric price negotiation is derived from the economic theory of search behavior that integrates findings from the behavioral literature. In particular, buyers are assumed to maximize their net present expected utility, but do so myopically over a short time horizon. Buyers evaluate a seller's relative offer or the difference between the seller's current offer price and a reference price. The model implies that the purchase hazard rate increases with time and negotiation cost, but decreases with offer rate and average relative offer.; Model properties are empirically tested using a competing-risks proportional hazard model derived from the structural model. The empirical model is estimated on a sample of actual negotiations over the rental of a durable product; the results confirm the properties of the structural model. The empirical model is used to explore alternative specifications of the buyer's reference price. It is shown that buyers tend to rely on the most recent offer price when evaluating the seller's offer in the sample of negotiations.