Why is bargaining more common in poor countries?

Question

In poor countries, one might bargain over even say a bottle of water. This is unthinkable in most rich countries. (And in countries that develop rapidly, one can actually notice the steady movement from bargaining to fixed prices.)

The "obvious" explanation is that time is less valuable in poorer countries and so people (both buyers and sellers) are willing to spend some time bargaining.

But I wonder if there have been more in-depth attempts to understand this matter (empirical and theoretical).

Answer 1

In first world countries, the price of a bottle of water is set by a well-established market. There are millions of prospective buyers of a bottle of water and thousands of prospective suppliers, and while many suppliers are able to achieve brand differentiation, for the most part their water is fungible. Moreover, the supply and demand curves of water are reasonably stable, and water companies have the excess capital to hold inventory stockpiles that further reduce the volatility of prices. There is little information asymmetry. Customers can easily comparison shop, and price discrimination is very difficult. Suppliers are generally large corporations, which means that allowing bargaining would introduce massive headaches, such as agent-principal issues. There's also a feedback effect: once an economy and culture are built around fixed prices, it's more difficult to introduce bargaining. Water companies are in a low-margin business where their money comes from high volume. Spending resources bargaining would destroy those margins.

Answer 2

I think the best approach to describe this phenomenon is to see it as a change from relational-oriented economics of poor countries (developing countries) to transactional-oriented economics of developed countries. The first is governed by uncertainty: the good’s value is what the customer is willing to pay, it difficult for the seller to calculate all the costs involved in selling the good, and without specialization there is no knowledge to calculate how much of items must be sold for price X to reach the certain profitability.

Example:

Lets imagine a street seller of bottled water in a developing country. The price of a bottled water will not be fixed, if his business activity has too many unknown factors. Perhaps he knows the price per unit at which he bought a bottled water, but there are more factors he has to consider. For example,

• Will the deliveries of bottled water from the manufacturer reoccur in the future?
• Is the bottled water delivered in a timely fashion?
• Does he have a sure mean of transportation to get to or back from the street where he sells his product?
• Can he be sure that no one will take his ‘spot’ on the street, or his market position in general?
• Can he be certain about the quality of the bottled water?
• Can he trust the law enforcement if someone steals his yield?

With development of institutions and with specialization, the participants of the market are more interested in transactions (to get the job done) rather in having a good relationship with the supplier, truck driver or law enforcer. Thus,

• they can calculate their cost,
• they can enter into a contract for week-to-week supply of goods and be sure that the product will be delivered on time (right before the shop opens and in the quantity they will be able to store and sell),
• they have some accountancy proficiency to keep track of turnover and marginal costs.

This enables to calculate profitability of the business give the price of a certain level. If you don’t agree with the price you will not buy the product, which is fine with the seller, because he thinks in the long-run and he may adjust in the price in the future to meet certain profitability.

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I couldn’t find any of the articles I had in mind when writing this answer, but this quote form 'East Meets West: Civilizational Encounters and the Spirit of Capitalism in East Asia', 2007, summarizes the issue quite well.

If transactional rationality follows neo-Darwinism and natural law, it may be deducted that the natural selection process will eventually favor transactional rationality over relational rationality. Indeed, many examples and studies demonstrating the relational imperative of exchanges, especially from anthoropological studies, drew on data and observations from ancient or primitive societies. It has been suggested that emphasis on interpersonal relationship reflects the nature of communities that are more homogeneous, less technologically developed, and less industrially developed, and where rituals, ascription, and emotion define exchanges. As a society develops technologically and industrially and becomes more diverse in skills, knowledge and production, division of labor requires more rational allocation of resources, including the increasing importance of rationality for resource transactions in exchanges. It has further been argued that the relational significance in economic exchanges today represents residual effects from the past. As the selective process proceeds, relational significance will eventually be superseded and replaced by transactional significance. [...]

The author, however, criticized this view saying that there is no empirical evidence for a development view between relational rationality and transactional rationality (the author’s main interest is the difference between cultures of East and West).

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As for the empirical research itself, I’ve seen many comparisons between transactional selling vs. relational selling, but this is a comparison between different marketing strategies (and approaches to marketing in general) in developed countries rather than cross-national analysis. This refers to your question in some way, for example in relational selling you are more inclinable to extend your budget for a certain customer and renegotiate price for the sake of creating long-lasting relationship with your client.

Hope this helps.

Answer 3

Time is money

When the average daily wage is 5 dollars, and many others survive on 1-2 dollars a day, it's worth it to many people to take a few minutes to try to get an extra nickel or dime out of the sale.

Also, with high unemployment (especially in cities, since in rural areas there is the availability of subsistence farming as an alternative), the opportunity cost to taking time to negotiate can be zero.

Another point worth mentioning is related to "repeated games". If you're visiting some place and will only ever buy one bottle of water from that person, they may rationally try to get the highest possible price. (This ignores that visitors may eventually be driven away from bringing money into the local economy ...). But if you live there (and ignoring that you would know what the market price was anyways, since you live there and all) then they will be less likely to try to take advantage of a buyer, because you might decide never to do business with that person again.