The Theory of List Price

Abstract

This paper presents a model of a firm with a list price and some negotiated sales. Consumers with demand prices higher than list will purchase without negotiating. A proportion (v) of those with demand prices below will be turned off, and the firm acts as a first-degree price discriminator with the rest. The optimal price varies with v, marginal cost, and the firm's cost of negotiating. A lesser v raises price and causes more negotiated sales. If v or negotiation costs are too large the firm will cease to be a price discriminator. (042, 043, L13)