What is the Reservation Price?
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Is the highest price a buyer is willing to buy and the lower the seller is willing to sell.
Let’s find out some buyer-side and seller-side features together!
Parties to a transaction usually do not disclose it in advance as part of the negotiation strategy. Why?
– Buyer- side:
If a customer discloses his or her reserve price, the seller may take advantage of that information and charge the maximum possible for his or her product.
– Seller- side:
Similarly, if the producer revealed his reserve price, the buyer might pay the lowest possible amount for the goods, even though he might have considered a higher rate in his budget.
Reserve price depends on:
– Buyer- side:
- The First factor is the budget constraint, i.e. the income of the individual or family. The higher these rents are, the more there will be a desire to spend.
- The second one determining the buyer’s reserve price is the profit obtained from consuming the good or service. The greater this satisfaction, the higher the rate the user will be able to pay.
– Seller- side:
- The reserve price depends, among other variables, on the cost of production factors. The cheaper they are, the company will be able to accept a lower tariff for its product.
But in the opposite scenario, for example, if wages or inputs become more expensive, the company will have to sell for more to recoup its investment.
Now that we have understood how the reservation price works, don’t miss the next article where we will understand
how to calculate your reservation price and how to improve it!