Do Buyer-Size Discounts Depend on the Curvature of the Surplus Function? Experimental Tests of Bargaining Models

A number of recent theoretical papers have shown that for buyer-size discounts to emerge in a bargaining model, the total surplus function over which parties bargain must have certain nonlinearities. We test the theory in an experimental setting in which a seller bargains with a number of buyers of different sizes. We generate nonlinearities in the surplus function by varying the shape of the seller's cost function. Our results strongly support the theory. As predicted, large-buyer discounts emerge only in the case of increasing marginal cost, corresponding to a concave surplus function.