Competition in a spatially-differentiated product market with negotiated prices
Howard Smith (),
Walter Beckert and
No 921, Economics Series Working Papers from University of Oxford, Department of Economics
In many markets the buyer pays an individually-negotiated price. TheoÂretically, relative to uniform-pricing, this has an ambiguous impact on market power and the effects of merger. To analyze competition in the UK brick industryâ€”where individually-negotiated pricing is used, and the market is highly concentratedâ€”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 reÂject the hypothesis of price-taking buyers, calculate the distribution of markups, and measure the effect on markups of multi-product ownership and buyer locaÂtion. 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 and because it imposes buyer price-taking.
Keywords: individualized pricing; bargaining; price discrimination; spatial difÂ¬ferentiation; merger analysis; construction supplies (search for similar items in EconPapers)
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