The Price Is Right—Or Is It? A Reference Point Model of Two-Party Price Negotiations

Abstract

This paper develops a social cognitive, reference point model of two-party price negotiations. The theoretical focus is on the role that reference points play as a means of calibration in the individual negotiator's decision processes and as a means of social influence in bargaining. Three studies are presented which examine how reference points based on personal preferences and budget constraints (i.e., reservation values) are combined with reference points based on available market information to affect outcomes. These studies support the interpretation that in captive transactions, contextual cues determine the extent to which market information versus reservation values influence outcomes. Certain contextual cues trigger perceptions of low versus high price variance, which in turn, lead negotiators to weight market information more or less heavily in internal processing and bargaining. When perceptions of low price variance are present, market information influences outcomes more than private reservation values. When perceptions of high price variance are present, reservation values tend to be more dominant in determining outcomes.