Enterprise News

Putting a price on mind games

Dec 06/Jan 07 issue

When it comes to buying and selling, most people believe if you ask for more, you will get more. As a result, people expect that setting a high starting price will always bring them a higher final price. This, however, is not necessarily the case.

A study published in the Journal of Personality and Social Psychology by professor Gillian Ku of the London Business School and professors Adam Galinsky and Keith Murnighan of the Kellogg School of Management at Northwestern University, finds evidence to counter this start high, end high mantra.

The research reveals that in buyer-seller negotiations, the starting price often acts as an anchor that limits and constrains counter-offers. Auctions, on the other hand, are social settings with different dynamics.

Unlike buyer-seller negotiations, in which the number of parties is fixed, the number of potential bidders in auctions is basically unlimited and influenced by the starting price.
The people who enter into the auction early, the research claims, start to invest time and energy and people then try to recover this cost by bidding more, in essence trying to justify their past bids. In addition to this, the research shows that more bids and more bidders imply the item is valuable and is worth bidding on.

The research suggests the following tips for sellers: in a one-on-one negotiation, set high starting prices; in an auction with a large set of potential buyers, set low starting prices; and in an auction with few interested buyers, set a high starting price and possibly negotiate with prospective buyers.