Dropping anchors

By — on / Business Negotiations, Daily

Adapted from “Anchors or Trial Balloons?”, first published in the Negotiation newsletter.

The power of anchors in negotiation has been demonstrated time and again. Sellers who demand more tend to get more. Indeed, the initial asking price is usually the best predictor of the final agreement.

A trio of researchers may have found an important exception to this rule, however: lower starting numbers set by the seller in an auction can lead to higher ultimate prices. Professors Gillian Ku of the London Business School and Adam D. Galinsky and J. Keith Murnighan of Northwestern’s Kellogg School of Management found this result both in laboratory experiments and in data from online eBay auctions.

Ku, Galinsky, and Murnighan suggest that three different factors may jointly explain this “start low, end high” effect. First, by lowering the starting price, sellers reduce an important entry barrier to the auction, thereby increasing the number of bidders. Second, as more bidders invest time and energy in the auction, some of them get caught in sunk-cost traps that lead them to stay in the game longer than they’d planned. Third, encouraging more bidders to enter heats up the market, leading people to infer that a given item is more valuable than they originally thought.

The “start low, end high” finding poses a dilemma for sellers in negotiation. Setting a high anchor in a one-on-one transaction may well induce a more generous counteroffer, but only if you already have a prospective buyer sitting at the bargaining table. This new research reminds us of the importance of attracting prospects and getting buyers to bid against one another for your goods or services. For example, last year in Santa Clara County, Calif., 60% of homes still sold for more than the asking price, in spite of a general slowdown in the U.S. real estate market. Ku, Galinsky, and Murnighan found that these sellers successfully negotiated profitable deals in the end by anchoring low, not high.

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