Bargaining Microfoundations for Productivity Dispersion

John Thanassoulis

No 262, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: This paper analyses the implications of bargaining between buyers and sellers on the competitive outcome in a homogeneous good industry. Bargaining creates a competitive equilibrium in which some inefficient sellers coexist with efficient ones leading to productivity dispersion. Rival cost uncertainty then creates an endogenous distribution of productivities which shrinks if rival numbers grow - exactly paralleling current empirical findings. The ability to bargain results in list price dispersion but transaction price uniformity. The bargaining models is not observationally equivalent to Bertrand pricing with product differentiation as positive mark-ups are predicted as idiosyncratic seller cost shocks become small. This and other predictions of the baragining model of competition are assessed against the empirical evidence. The insights are robust to search costs with a nonsequential search stratgegy where a pure strategy (no sales) price equilibrium is found. Further, the results extend to markets without bargaining if sellers post price matching guarantees.

Keywords: Bargaining; List Prices; Transaction Prices; Price-matching Guarantees; Productivity Dispersion; Trade Liberalization. (search for similar items in EconPapers)
JEL-codes: D24 D43 F12 L11 (search for similar items in EconPapers)
Date: 2006-04-01
New Economics Papers: this item is included in nep-com and nep-mic
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