Competition in a Spatially-Differentiated Product Market with Negotiated Prices

56 Pages Posted: 3 Nov 2020 Last revised: 22 Sep 2021

See all articles by Walter Beckert

Walter Beckert

affiliation not provided to SSRN

Howard W. Smith

University of Oxford - Department of Economics

Yuya Takahashi

University of Washington

Date Written: October 2020

Abstract

In many competitive markets the buyer makes a choice between differentiated products and pays a negotiated price. We develop for estimation a discrete-choice model of differentiated product demand, where prices are the outcome of negotiations. The model is consistent with non-cooperative models of bargaining with multiple potential sellers. We show that when the buyer's utility has GEV disturbances the model has a tractable likelihood function for use with transaction-level data giving the selected product and its price for each transaction. We estimate the model using data from the UK brick industry and use it to measure market power and analyze mergers. We measure the contribution of spatial differentiation and ownership concentration to the distribution of market power across individual transactions. In counterfactuals we find that, relative to uniform-pricing, individually-negotiated pricing leads to reductions in mean markups and merger effects, although markups and merger effects increase in a minority of transactions.

Keywords: Bargaining, construction supplies, individualized pricing, Merger Analysis, price discrimination, Spatial differentiation

Suggested Citation

Beckert, Walter and Smith, Howard W. and Takahashi, Yuya, Competition in a Spatially-Differentiated Product Market with Negotiated Prices (October 2020). CEPR Discussion Paper No. DP15379, Available at SSRN: https://ssrn.com/abstract=3723569

Walter Beckert (Contact Author)

affiliation not provided to SSRN

No Address Available

Howard W. Smith

University of Oxford - Department of Economics ( email )

Manor Road Building
Manor Road
Oxford, OX1 3BJ
United Kingdom

Yuya Takahashi

University of Washington ( email )

Seattle, WA 98195
United States

HOME PAGE: http://https://econ.washington.edu/people/yuya-takahashi

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