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 behaviour. 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.

How the Nature of Product Differentiation Affects Procurement Competition

“…Because of the difficulty in deriving analytic solutions with private preferences, numerically approximate the sellers' equilibrium price‐setting functions for specific distributions F ( c ) and G ( v ) . They use an iterative procedure in which seller 1's rivals are assumed to use a particular price‐setting function, p 0 ( c ).…”

“…Given that the private preference setting at present can be solved only numerically, to compare procurement outcomes from all three settings I must specify the distributions F ( c ) and G ( v ) of costs and values. For simplicity I use the values of N and the distributions used in the experiments from , ). The N value is 2 or 4, the sellers' costs are distributed Uniformly from 0 to 600, and the buyer's values are distributed Uniformly from 300 to 900.…”

“…The procurement format is what refer to as a buyer‐determined mechanism : Sellers simultaneously offer prices to the buyer, and the buyer purchases at the offered price from the seller whose price offer and value combine to give the buyer its greatest positive payoff. introduce the private preference model to assess the importance of product differentiation in their experimental comparison of different procurement mechanisms, but their analysis of the model's theoretical properties is limited.…”

Information Revelation in Procurement Auctions with Two‐Sided Asymmetric Information

“…(), Rezende (), Kostamis et al. (), and Kaplan () for theoretical analyses; Thomas and Wilson () and Haruvy and Katok () apply experimental methods.…”

“…With reference to policy C in a setting similar to our, Thomas and Wilson () claim that “theoretical characterization of equilibrium behavior in the settings we consider remains an open problem” to explain their use of experimental methods.…”