The descriptive and prescriptive use of previous purchase price in negotiations

This paper investigates whether the pervasive sunk cost phenomenon documented in the literature (Arkes & Blumer, 1985; Brockner and Rubin, 1985; Staw, 1976; Staw & Ross, 1978) exists in negotiations. In particular, we are interested in the impact that sunk costs have on negotiators' expectations, strategies, and negotiated outcomes. Negotiations create an opportunity to examine whether sunk costs are transmitted beyond the initial decision-maker in a competitive context and therefore offer a unique domain for the study of sunk costs. This paper examines whether both sellers and buyers, engaged in a real estate negotiation, are affected by the amount sellers previously paid for their property. We are particularly interested in whether the sunk costs of the seller affect the buyer's decisions. Two hundred eighty-six subjects participated in three studies exploring the use of sunk costs in negotiation contexts. Study 1 demonstrates that buyers base their initial and highest offers on the sellers' previous purchase price. Study 2 demonstrates that sellers base their lowest acceptable offers on their previous purchase price. Study 3 reveals that the sellers' previous purchase price affects not only the buyers' and sellers' offers and expectations, but also the final negotiated outcome. The integration of these studies suggests that sunk costs do transmit across players, and that while the consideration of one's own sunk costs may be irrational from an economic perspective, the consideration of one's opponent's sunk costs may be strategically rational if such consideration provides a descriptive analysis of one's opponent's actions.