Bargaining on Behalf of Price-insensitive Downstream Consumers
Abstract
There are economic settings in which decision makers are indifferent to prices. For example, a patient seeking medical treatment is indifferent to the treatment’s cost, if it is covered by his insurance program. We study price bargaining between suppliers and an intermediary, where the latter represents consumers who are characterized by price insensitivity. We show that when the intermediary bargains simultaneously with all suppliers, then if the suppliers have sufficient bargaining power the resulting prices are too high; specifically, prices exceed the value of the good/service being delivered. Sequential negotiations prevent this pathology. The intermediary’s payoff is independent of the negotiations order, but the suppliers’ payoffs are not; under some conditions, a supplier’s payoff is increasing in the supplier’s position in the sequence.