Optimum Starting Prices for Negotiations and Auctions (and Why)

A high ini­tial offer in nego­ti­ations is more likely to lead to a high final price, yet in auc­tions a low start price is more likely to lead to a high final price.

These are the find­ings of a recent study that attemp­ted to find the optim­al start­ing prices for nego­ti­ations and auc­tions.

In nego­ti­ations (where the num­ber of act­ors is often pre­de­ter­mined), start­ing prices drive cog­nit­ive pro­cesses, lead­ing indi­vidu­als to select­ively focus on inform­a­tion con­sist­ent with, and make valu­ations sim­il­ar to, the start­ing value. Thus, start­ing high will often lead to end­ing high in nego­ti­ations. Con­versely, in auc­tions (where the num­ber of act­ors is determ­ined dur­ing the course of the auc­tion), low start­ing prices cata­lyze social pro­cesses that can lead to high­er final prices: Low start­ing prices lower bar­ri­ers to entry and increase the num­ber of bid­ders; pro­duce more sunk costs for early entrants; and lead par­ti­cipants to infer great­er value from this increased bid­ding activ­ity, res­ult­ing in herd­ing beha­viour.

As Mind Hacks sum­mar­ises: nego­ti­ation relies heav­ily on the anchor­ing effect (of which there are “few psy­cho­lo­gic­al phe­nom­ena as robust”), where­as in auc­tions “price rise [is] driv­en by social com­pet­i­tion and so start­ing with a low entry point encour­ages more people to join in; once someone has bid, they have made a com­mit­ment which is likely to encour­age them to con­tin­ue; and finally, more bids leads us to infer that the item has a high­er value”.