Competition in a spatially-differentiated product market with negotiated prices

Howard Smith, Walter Beckert and Yuya Takahashi

No 15379, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In many competitive markets the buyer makes a choice between differentiated products and pays a negotiated price. We develop for estimation a discrete-choice model of differentiated product demand, where prices are the outcome of negotiations. The model is consistent with non-cooperative models of bargaining with multiple potential sellers. We show that when the buyer's utility has GEV disturbances the model has a tractable likelihood function for use with transaction-level data giving the selected product and its price for each transaction. We estimate the model using data from the UK brick industry and use it to measure market power and analyze mergers. We measure the contribution of spatial differentiation and ownership concentration to the distribution of market power across individual transactions. In counterfactuals we find that, relative to uniform-pricing, individually-negotiated pricing leads to reductions in mean markups and merger effects, although markups and merger effects increase in a minority of transactions.

Keywords: Individualized pricing; Bargaining; Price discrimination; Spatial differentiation; Merger analysis; Construction supplies (search for similar items in EconPapers)
Date: 2020-10
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Citations: View citations in EconPapers (2)

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