DP15379 Competition in a spatially-differentiated product market with negotiated prices

Author(s): Walter Beckert, Howard Smith, Yuya Takahashi
Publication Date: October 2020
Date Revised: April 2021
Keyword(s): Bargaining, construction supplies, individualized pricing, Merger Analysis, price discrimination, Spatial differentiation
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15379

In many markets the buyer pays an individually-negotiated price; this can have major policy-relevant impacts on competition. We develop a model of differentiated-product demand and individually-negotiated pricing, with a competitive role for the runner-up product, and use it to analyze market power, pricing policy, and mergers in the UK brick industry. Using transaction-level data we estimate the contribution of spatial differentiation and ownership concentration to market power in individual transactions. In counterfactuals, we find that, relative to uniform-pricing, individually-negotiated pricing generally reduces markups, although not in all transactions, and abates the markup-increasing effects of mergers, except in the worst-affected transactions.