Competition in a spatially-differentiated product market with negotiated prices

Working paper : Discussion paper

n many markets the buyer pays an individually-negotiated price. Theoretically, relative to uniform-pricing, this has an ambiguous impact on market power and the effects of merger. To analyze competition in the UK brick industry—where individually-negotiated pricing is used, and the market is highly concentrated—we develop a model of negotiated pricing and discrete-choice demand which permits alternative specifications for how the buyer’s runner-up product affects price negotiations. We derive a likelihood for observed choices and prices and estimate the model using transaction-level data. We use the model to reject the hypothesis of price-taking buyers, calculate the distribution of markups, and measure the effect on markups of multi-product ownership and buyer location. A counterfactual policy of uniform pricing increases average markups by about one-third, harms most buyers, and magnifies the price-increasing effect of merger. Average markups increase because uniform pricing is intrinsically less competitive nd because it imposes buyer price-taking.

Authors: Beckert, W; Smith, H; Takhashi, Y

• Publication status: Published
• Publisher: University of Oxford : Economics
• Host title: Department of Economics Discussion Paper Series
• Series: Department of economics discussion paper series
• Publication date: 2020-10-01
• ISSN: 1471-0498
• Paper number: 921
• Language: English
• Keywords: SBTMR; individualized pricing; bargaining; price discrimination
• Subtype: Discussion paper