Horizontal Product Differentiation in Auctions and Multilateral Negotiations

Charles Thomas and Bart Wilson

Economica, 2014, vol. 81, issue 324, 768-787

Abstract: type="main" xml:id="ecca12090-abs-0001">

We experimentally compare first-price auctions and multilateral negotiations after introducing horizontal product differentiation into a standard procurement setting. Both institutions yield identical surplus for the buyer, a difference from prior findings with homogeneous products that results from differentiation's influence on sellers' pricing behaviour. The data are consistent with this finding being driven by concessions from low-cost sellers in response to differentiation reducing their likelihood of being the buyer's surplus-maximizing trading partner. Further analysis shows that introducing product differentiation increases the intensity of price competition among sellers, which contrasts with the conventional wisdom that product differentiation softens competition.

Date: 2014
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Working Paper: Horizontal Product Differentiation in Auctions and Multilateral Negotiations (2008)
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