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”.