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Competition in a spatially-differentiated product market with negotiated prices

Author

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  • Howard Smith
  • Walter Beckert
  • Yuya Takahashi
Abstract
In 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 and because it imposes buyer price-taking.

Suggested Citation

  • Howard Smith & Walter Beckert & Yuya Takahashi, 2020. "Competition in a spatially-differentiated product market with negotiated prices," Economics Series Working Papers 921, University of Oxford, Department of Economics.
    • Handle: RePEc:oxf:wpaper:921
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    References listed on IDEAS

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    Keywords

    individualized pricing; bargaining; price discrimination; spatial dif¬ferentiation; merger analysis; construction supplies;
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