Sequential Bargaining with Incomplete Information and Endogenous Reference Points

We study the role of reference-dependent preferences on the outcome of a negotiation between an uninformed seller and reference-dependent consumers. The results of our model show that loss aversion combined with an endogenous reference point causes more consumers to purchase in the first stage of the negotiation. The surplus for low-valuation consumers increases. As more consumers buy at higher prices, the profit of the seller increases. These results are driven by the ability of the seller to manipulate the consumer’s reference point.