Repeated -transactions bargaining with two -sided uncertainty

Buyers\u27 responses to prices seem to be affected by their beliefs about sellers\u27 costs. While at odds with the usual view of the buyer, this behavior is shown to be economically rational by this study. I model the buyer-seller relationship as a dynamic game of two-sided incomplete information and derive the following equilibrium results. (1) When the buyer thinks it likely that the seller\u27s cost is low, he is willing to reject any but very attractive, i.e., low, prices. This willingness threatens the seller with opportunity costs, causing her to set lower prices than she otherwise would. The buyer\u27s surplus is, thus, larger than it would be without the strategy, so the strategy pays off for the buyer. (2) The buyer\u27s willingness to reject high prices is more effective at inducing the seller to offer lower prices when the seller believes it likely that the buyer\u27s reservation value is low. (3) Since delayed consumption (as opposed to immediate consumption) imposes relatively low opportunity costs when the discount rate is low, the lower is the discount rate the more likely is the buyer to be willing to refuse the seller\u27s terms and, in general, the lower are the seller\u27s prices. (4) The longer a buyer whose reservation value is high can keep the seller unaware of this fact, the longer he gets to enjoy lower prices than would be set if the seller knew the truth. As a result, the longer the relationship, the more likely is the buyer to reject prices that would reveal to the seller that his reservation value is high. Data from a laboratory test of these results provide directional support for the theory\u27s qualitative predictions. The theory\u27s point predictions were not supported. The deviations were caused by buyers refusing prices they would have accepted if, as assumed, they were income maximizers playing games that gave them no opportunities to establish reputations across interactions. The data suggest that they saw opportunities to establish reputations that would affect play across interactions