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Possibly-Final Offers Nolan Miller, Nikita Piankov, and Richard Zeckhauser Abstract: A price-setting seller faces a buyer with unknown reservation value, who may accept or reject the seller's offer. We show that buyer risk aversion can make it in the seller's interest to employ a Possibly-Final Offer (PFO) strategy. That is, the seller should make an offer that, if rejected, will be his final offer with some positive probability strictly less than one. With the complementary probability, a rejection will be followed by a subsequent, more attractive offer. As the buyer become infinitely risk averse, the seller's expected profit under the optimal PFO strategy approaches the full-information profit. The results extend to contexts with multiple types of buyers, multi-dimensional objects, non-separable utility functions, and loss-averse buyers. Forthcoming, Journal of Economics and Management Strategy. |
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