Negotiating Prices for Customized Services

Abstract

This research analyzes the circumstances under which service providers can benefit from negotiating prices for customized services. In the authors’ model, a service provider offers a service in different degrees of customization. As a pricing mechanism, the service provider either applies a posted-price or a bargaining strategy. Although the posted-price versus bargaining problem has been extensively discussed in the literature, previous work does not address the relevance of customization and has not yet focused on its impact on the pricing mechanism. The model shows that the decision in favor of the bargaining strategy depends on several factors. Consumers’ willingness to pay is typically higher for customized services, which favors the bargaining strategy. In addition, low bargaining costs and low consumer bargaining power make the bargaining strategy even more attractive. According to these results, service providers can benefit from negotiating prices for customized services and posting prices for standardized services.