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) 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.

Price Discrimination and Bargaining: Empirical Evidence from Medical Devices

“…A companion paper, Grennan (2012), explores this issue further, but data limitations prevent more than a high-level, descriptive analysis. Anecdotal evidence from industry professionals suggests that there are economic forces such as human capital and organizational structure/incentives underlying these firm-level bargaining abilities.…”

“…With standard deviation of 0.07, however, there is significant variation around this mean. A companion paper, Grennan (2012), uses the panel structure of the data and hospital characteristics to further explore this bargaining ability variation. Importantly for this study, the panel data allows for a regression of ln( β jh ν jht ) on manufacturer and hospital dummy variables, and the coefficients on each firm dummy variable ( β j , β h ) provide a measure of the average bargaining ability of each firm across bargaining partners and over time.…”

Models of Value Creation Measurement in Different Manufacturing Industry Sectors in the Czech Republic

“…Our models are unique in this. The value is assessed purely in terms of financial data, rather than the value of the company for consumers wider Grennan, 2014), nor does it attempt to quantify the value for other entities, which we can call such as stakeholders (Charreaux, Desbrières, 2001).…”

The Effect of Bidimensional Power Structure on Supply Chain Decisions and Performance

“…Their study shows that power structure makes impact on the efficiency of the supply chain and the impact is dependent on both expected demand and demand shock. Grennan [23] empirically analyzed the relationship between power dynamics, more specifically, firms' bargaining ability and competitive advantage in the context of hospitals and medical device supplier. His findings indicate that the variation in purchasing prices of the same device is mainly due to the difference in bargaining ability.…”