Horizontal Product Differentiation in Auctions and Multilateral Negotiations

Abstract

We experimentally compare first-price auctions and multilateral negotiations after introducing horizontal product differentiation into a standard procurement setting. Both institutions yield identical surplus for the buyer, a difference from prior findings with homogeneous products that results from differentiation’s influence on sellers’ pricing behavior. The data are consistent with this finding being driven by concessions from low-cost sellers in response to differentiation reducing their likelihood of being the buyer’s surplus-maximizing trading partner. Further analysis shows that introducing product differentiation increases the intensity of price competition among sellers, which contrasts with the conventional wisdom that product differentiation softens competition.

Keywords: voluntary exchange, multilateral negotiations, auctions, product differentiation

JEL Classification: C78, D44, C9, L14