THE DESCRIPTIVE AND PRESCRIPTIVE USE OF PREVIOUS PURCHASE PRICE IN NEGOTIATIONS

This paper investigates whether the pervasive sunk cost phenomenon doc umented in the literature (Arkes & Blumer, 1985; Brockner and Rubin, 1 985; Staw, 1976; Staw & Ross, 1978) exists in negotiations. In particu lar, we are interested in the impact that sunk costs have on negotiato rs' expectations, strategies, and negotiated outcomes. Negotiations cr eate an opportunity to examine whether sunk costs are transmitted beyo nd the initial decision-maker in a competitive context and therefore o ffer 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 sell er affect the buyer's decisions. Two hundred eighty-six subjects parti cipated in three studies exploring the use of sunk costs in negotiatio n contexts. Study 1 demonstrates that buyers base their initial and hi ghest offers on the sellers' previous purchase price. Study 2 demonstr ates that sellers base their lowest acceptable offers on their previou s purchase price. Study 3 reveals that the sellers' previous purchase price affects not only the buyers' and sellers' offers and expectation s, but also the final negotiated outcome. The integration of these stu dies suggests that sunk costs do transmit across players, and that whi le the consideration of one's own sunk costs may be irrational from an economic perspective, the consideration of one's opponent's sunk cost s may be strategically rational if such consideration provides a descr iptive analysis of one's opponent's actions. (C) 1996 Academic Press, Inc.