Reference Prices as Determinants of Business‐to‐Business Price Negotiation Outcomes: An Empirical Perspective from the Chemical Industry

Price negotiations in supply chain relationships often take place during annual pricing reviews. This study integrates transaction cost economics and reference price thinking from consumer behavior to understand better how a seller's reservation price, aspiration price, and initial price offering might influence the ultimate settlement price. We apply ridge regression to negotiation data from 282 business relationships of a G erman chemicals supplier with customers in six client industries. Overall, the three determinants explain 86 percent of the variation in the settlement price. A seller's reservation price is substantially less important than the aspiration price or the initial price offering. Although this outcome can be explained via a reference price perspective, transaction cost economics theory helps clarify the industry differences that determine the impact of reservation prices and initial price offerings on settlement prices.