Shopper’s Dilemma

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prisoners_dilemma_23“Tapaiko pani haina, mero pani haina, 1000 rupees ma dinus na!” This must sound familiar to a lot of shopaholics out there who are more than familiar with the nuances of bargaining. Be it in the busy markets of Asan Bazaar or the retail hubs of New-Road, negotiating and striking a deal is common phenomena. Being an avid shopper with a passion for good bargains, I believe that these daily market negotiations are true representations of a free market, allocating prices of commodities. Although not all, some of the fixed- price counterparts, might conversely be victims of the prisoner’s dilemma.

For the readers who aren’t familiar with the famous game theory concept developed by RAND Corporation scientists, Merrill Flood and Melvin Dresher and formalized by Princeton mathematician, Albert W. Tucker; Prisoner’s Dilemma is a strategy which attempts to explain the behavioral balance between co-operation and defection in human beings. This classic game model sets out two prisoners who cannot communicate at all with each other. Both of them are given an option either to confess or to remain silent. If both the prisoner’s remain silent, then they both will serve 1 year in prison. However, if Prisoner A confesses, and Prisoner B remains silent; then Prisoner A is set free, while Prisoner B will spend 3 years in prison instead and vice versa. Lastly, if both of them confess, then both will be spending 2 years in prison each. Here, remaining silent and co-operating is clearly the most mutually beneficial strategy. However, betraying makes the most rational sense for each individual prisoner, and hence confessing becomes the dominant strategy. Both prisoners then resort to confessing which makes the prison sentences worse for both of them.

Fixed price stores, have set non-negotiable prices of commodities which might distort free market allocation of pricing. Looking at this from a game theory perspective, conforming to a given set price might be looked upon as refusing to co-operate (defecting) to get to a certain price. On the other hand, bargaining and agreeing on a price can be seen as co-operation. Hypothetically speaking in any given month, without bargaining, a seller earns total profit of NRS. 50,000 and a customer can buy 50 things on average with NRS. 50,000. Conversely if both parties bargain, then the shopkeeper can earn total profit of NRS. 70,000 and the customer can buy 70 things with NRS. 50,000. However, if the shopkeeper refuses to bargain and quotes a high price for his products, and a customer walks in and buys the product, then the shopkeeper earns a profit of NRS. 90,000 while the customer can only buy 30 things with NRS. 50,000. Lastly, if the customer refuses to pay more than a certain amount for a product and the shop keeper agrees to their price, then the seller earns only NRS. 35,000 in profits and the customer can buy 90 things with NRS. 50,000. Simplistically looking at this model, both parties benefit by having a fair bargain. However, both sellers and buyers resort to a fixed price shopping system so that they can each individually gain more by not bargaining, thus losing out on greater profits which bargaining offers.

This simplistic model shows that both parties benefit from bargaining. Does this mean that all stores will benefit from being bargain joints? Most definitely not! Real world markets are not isolated and solely confined to one particular factor like the prison sentence in the prisoner’s dilemma example.  Consumer choices are based on a variety of preferential factors like ease of shopping, shoe-leather costs, and prestige in buying rare expensive luxury items. These are the reasons why one-stop-shopping centers like Bhat-Bhateini Supermarket and branded stores in Durbar Marg are profitable. However, fixed price retails still exist between pools of shops open for bargaining. Without specialized commodities that set them apart, and a niche market to cater to, the sellers are definitely foregoing the sales and the potential profits by refusing to negotiate prices. Customers that prefer to shop in those stores are also losing out on better price deals they could get on the same item elsewhere. Additionally, shopping giant Bhat-Bhateini might also do well with a few separate bargain counters for the more thrifty spenders. While maintaining their existing clientele, this strategy of having majority normal checkout lanes with the exception of a couple bargain counters will definitely attract more local customers. The ease of one-stop-shopping experience with the option for a good bargain might be taking traditional departmental store shopping to a whole new level; and might be a potential venture Bhat-Bhateini might want to try out. Lastly, to the shopkeepers and shoppers: If the one and only reason you opt for fixed pricing option is because you don’t want to negotiate, you might be losing out big time. Keep shopping smart, people!

Sneha Pradhan

About Sneha Pradhan

Sneha Pradhan is a Researcher at Samriddhi Foundation with an interest in good governance. She is a graduate student at Heinz College, Carnegie Mellon University in Pittsburgh, Pennsylvania, pursuing a Master of Science degree in Public Policy and Management. She also has a Bachelor of Arts Degree in Economics and Statistics with a minor in Complex Organizations from Mount Holyoke College, South Hadley, Massachusetts.

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