Principals, agents, negotiation, and precommitments

by gwillen1 min read21st Sep 201227 comments


Personal Blog

I'm sure this observation has been made plenty of times before: a principal can gain negotiating power by delegating negotiations to an agent, and restricting that agent's ability to negotiate.

For example: If I'm at a family-owned pizza joint, and I want a slice of pepperoni but all they've got is meat-lover's, I can negotiate for the latter at the price of the former. This is a good deal with well-aligned incentives, and is likely to be accepted. But at a chain restaurant, the employees are not empowered to negotiate: It's the menu prices or nothing. Since I'm aware of their lack of power, and my demand for pizza is not very elastic, I'm likely to give them the higher price.

If I squint, this looks a lot like a precommitment, on the part of the pizza store, not to negotiate prices. But if they explicitly made such a precommitment, it might turn off customers -- nobody likes to feel like they're getting a bad deal, and a statement of precommitment (e.g. a sign reading "all prices are final") is likely to make customers feel marginally negative towards the business by drawing their attention to the money they aren't saving.

By contrast, the corporate form -- such as the chain store has -- gives this kind of 'precommitment' as a side-effect of the otherwise socially-normal behavior of delegating limited responsibility to employees. Same benefit, but without the drawback, mostly because the practice is socially-accepted.

Is there any literature that covers this kind of thing further? Particularly the link between precommitment and agents with limited negotating ability.

(I am sitting in a chain pizza store as I write this. Guess what I wanted to order, and what I got instead?)