Bargaining Ability and Competitive Advantage: Empirical Evidence from Medical Devices

Abstract

In markets where buyers and suppliers negotiate, supplier costs, buyer willingness-to-pay, and competition determine only a range of potential prices, leaving the final price dependent on other factors (e.g. negotiating skill), which I call bargaining ability. I use a model of buyer demand and buyer-supplier bargaining, combined with detailed data on prices and quantities at the buyer-supplier relationship level, to estimate firm bargaining abilities in the context of the coronary stent industry where different hospitals (buyers) pay different prices for the exact same product from the same supplier. I estimate that: (1) variation in bargaining abilities explains 79% of this price variation, (2) bargaining ability has a large firm-specific component, and (3) changes in the distribution of bargaining abilities over time suggest learning as an important channel influencing bargaining ability.