Haggling over substitutes

Using a model of substitutable goods I determine generic conditions on tastes which guarantee that fixed prices are not optimal: the fully optimal tariff includes lotteries. That is, a profit maximising seller would employ a haggling strategy. We show that the fully optimal selling strategy in a class of cases requires a seller to not allow themselves to focus on one good but to remain haggling over more than one good. This throws new light on the selling strategies used in diverse industries. These insights are used to provide a counter-example to the no lotteries result of McAfee and McMillan (J. Econ. Theory 46 (1988) 335). (C) 2003 Elsevier Inc. All rights reserved.