No abstract

Many important issues in business-to-business markets involve price discrimination and negotiated prices, situations where theoretical predictions are ambiguous. This paper uses new panel data on buyer-supplier transfers and a structural model to empirically analyze bargaining and price discrimination in a medical device market. While many phenomena that restrict different prices to different buyers are suggested as ways to decrease hospital costs (e.g., mergers, group purchasing organizations, and transparency), I find that: (i) more uniform pricing works against hospitals by softening competition; and (ii) results depend ultimately on a previously unexplored bargaining effect. (JEL C78, L13, L14, L64)

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) AbstractIn markets where buyers and suppliers negotiate, supplier costs, buyer willingness-topay, 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. * Data for this research was provided by Millennium Research Group (www.mrg.net). Special thanks for the guidance and encouragement throughout the many phases of this research project go to my dissertation committee: John Asker, Adam Brandenburger, Allan Collard-Wexler, Michael Katz, and Bernie Yeung. I also benefited from discussions with Heski Bar-Isaac, Luís Cabral, Catherine de Fontenay, JP Eggers, Robin Lee, PT Leger, Hong Luo, Gabriel Natividad, Joanne Oxley, Ariel Pakes, Mike Ryall, Rob Salomon, Gus Stuart, Ali Yurukoglu, and seminar audiences at Analysis Group, Arizona, Columbia, Georgia, LSE, NYU, Toronto, Wharton, and Yale. Andy Cron, John Brumleve, Mark Bly, Rob Tumarkin, and many others have been helpful in teaching me about medical device manufacturing and sales. Physicians and administrators at NYU Medical Center and CGH, Sterling, IL were especially generous with their time and knowledge regarding hospital purchasing and the inner workings of a cardiac catheterization lab. Some industry background research was conducted while attending the Transcatheter Cardiovascular Therapeutics 2008 conference, which was made possible by the Cardiovascular Research Foundation.

I n 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.Data, as supplemental material, are available at http://dx.