Price Discrimination and Bargaining: Empirical Evidence from Medical Devices

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)

The Welfare Effects of Third‐degree Price Discrimination in a Differentiated Oligopoly

“…29. Recent empirical studies on price discrimination under imperfect competition in final-product markets include Asplund, Eriksson, and Strand (2008), Grennan (2013), and Hendel and Nevo (2013).…”

Insurer Competition in Health Care Markets

“…7 Gowrisankaran, Nevo, and Town (2015) conducted their main analysis under the assumption that premiums are fixed, and insurers do not compete with one another for enrollees; they also examined a calibrated version of their model in which insurers engage in Nash-Bertrand premium setting. See also Grennan (2013) (who modeled individual hospitals bargaining with medical device manufacturers) and Lewis and Pflum (2015). 8 Ho (2006Ho ( , 2009 relaxed the assumption that insurers do not compete with one another and estimated a model of consumer demand for hospitals and insurers given the network of hospitals offered, as an input to a model of hospital network formation and contracting (assuming a take-it-or-leave-it offers model to determine hospital prices).…”

Business Models Nature and Benefits

“…Because creating value is a co-operative process -and everyone has a claim to what's left -firms cannot rely on their 'bargaining power' to secure a share of these 'leftovers': instead, they must exercise their 'bargaining ability' (Grennan, 2013).…”

“…By definition, these are the capabilities that are responsible for helping a firm to adjust to changing economic conditions, such as new 3 It is an open question what portion of profits is due to these two forces on an industry-by-industry basis, and empirical work on this issue has only just begun. Grennan's (2013) estimates indicate that about 79% of price variation in the market for stents is due to the bargaining ability of various hospitals, as opposed to their demand levels, which are a measure of the bargaining power of the suppliers. While this does not speak directly to the breakdown of profit between the ensured and the negotiated, this is considerable variation.…”