Bargaining and the bargain

Dickering with a car salesman over the price of an automobile has always been a proud American pastime. But in this age of budding electronic consumerism, people now can haggle with their grocer over how much they are willing to pay for a box of corn flakes or double-A batteries.

Welcome to the consumer revolution, where everything from groceries to airline tickets to gasoline - even mortgages - can be bought and sold at prices that are as fluid as running water.


The Internet is shifting the power from companies that set prices to consumers, and it is turning American commerce into a noisy Middle Eastern bazaar.

Although the phenomenon is still in its infancy, experts believe that the ability of consumers to negotiate is such a powerful force that it will alter the way companies set prices on everything from stereos to computers.


What's more, it will intensify competition among producers, force companies to innovate, and keep costs from skyrocketing. As a result, the consumer benefits by paying less and the economy hums with cylinders wide open.

While many people are excited, there is a potential dark side. Cutthroat pricing could force companies to fire workers, close plants and even fold under the pressure.

But in the end, millions of consumers benefit.

"I think this is just the beginning of the price revolution," said Edward Yardeni, chief economist and global investment strategist at Deutsche Banc Alex. Brown in New York.

For generations, consumers have lived in a traditional economy where prices have been fixed by suppliers. Even today, if a person wants to buy a television set, he pays the price demanded by Sears or Wal-Mart. There is generally no haggling with the clerk in the middle of an aisle - the price is set.

But in the past five years, Internet companies such as eBay, and have set up online markets where people come together from around the country on their computers and state the price they are willing to pay on anything from stereo speakers to hotel accommodations. lets people name prices for groceries - from diapers to dishwashing gel - and it boasts of savings of up to 50 percent. It also sells airline tickets, hotel rooms, gasoline and other products at the price the market will bear.

"If you can be flexible, you can create value for yourself," said Jay S. Walker, vice chairman and founder of "Consumers never had the power of simply saying, 'I'm flexible, here is my price.' People never have been able to use their flexibility to get savings."


eBay runs a 24-hour auction market that brings bidders and sellers together for the exchange of a panoply of items.

And at consumers band together and bid on cameras and DVD players to drive prices down with bulk purchases.

Yet, the ability to negotiate or place a bid on a product is nothing new. The concept is a throwback to ancient Babylonian villages where maidens were sold at auction to the highest bidder.

"It is embracing the past and a step forward," said Andrew Whinston, director of the Center for Research and Electronic Commerce at the University of Texas at Austin. "I think it is going to become pervasive."

Some believe it is more than a step forward, but a giant leap for consumers.

The ability to negotiate price blows away traditional theories about supply and demand because prices are set almost instantaneously. The price of an airline seat that is sold on, for example, isn't set in stone, but rises and falls based on the vagaries of momentary demand.


"Under the new system, there is a greater likelihood that the transaction will take place at correct prices," said Sung Won Sohn, chief economist at Wells Fargo & Co., a San Francisco-based banking company. "In the past, the prices were not correct in many cases."

And usually, that means prices were too high.

Amid this new electronic economy, prices should fall and the economy should run more efficiently. Companies that want the business will enter the market and cut prices to win business, and their factories will run at full speed.

Instead of taking off with empty seats, airplanes fill up at discounted prices because a $50 fare is better than nothing. The airline wins and so does the consumer.

"It is a loss to the economy when a plane takes off with empty seats," Whinston said.

But when prices fall and competition heats up, some companies might find the going rough. Some experts argue that corporations have grown complacent because of the robust economy, and they don't think many are prepared to face such intense pricing competition on the Internet.


Companies that are slow to change could see their profit squeezed by bigger, more efficient firms. As a result, they would be forced to lay off employees and either merge their businesses or fail.

"There will be fewer survivors in this rat race," Sohn said. "The survivors are going to be larger ... and more efficient."

Business conducted on the Internet is still a very small part of the U.S. economy. Twenty-six percent of U.S. households, or 27 million out of 103 million households, shopped online at the beginning of the year, according to the Yankee Group, a Boston-based research and consulting firm.

In last year's fourth quarter, retail sales on the Internet totaled $5.3 billion, a fraction of the $821 billion in total retail sales.

Most experts don't believe that the ability to bid for products is going to fade away. They see many more people logging onto the Internet to put in their bids for things they want to buy.

"I think we are seeing the tip of the iceberg," said David Provost, a senior analyst at Gomez Inc., an e-commerce research company based in Lincoln, Mass.


This emerging Internet marketplace, where products are purchased at the best price, would make Adam Smith, the 18th-century Scottish economist, beam.

In his book The Wealth of Nations, he wrote that the "price of free competition ... is the lowest which the sellers can commonly afford to take, and at the same time continue their business."

And so it seems that Smith's theories are finally being realized - at supersonic speed.

"I think he would think it is great that people finally got the message after a couple of hundred years." Whinston said.