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Bargaining Ability and Competitive Advantage: Empirical Evidence from Medical Devices (Job Market Paper)

By Matthew Grennan


Inmarketswherebuyersandsuppliersnegotiateprices, suppliercosts,buyerwillingnessto-pay, and competition (forces strategists often refer to as sources of bargaining power) determine only a rangeof 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. In this industry different hospitals pay different prices for the exact same product. I estimate that variation in bargaining abilities explains 71 % of this price variation. Bargaining ability also has a significant impact on firm profitability—a 20 % increase in bargaining ability translates into an average increase in profits of 6 % for hospitals and 11 % for manufacturers. I use the estimated model to simulate a policy change proposed in the U.S. Senate that could force eachproduct to be sold at the same price to all hospitals. Contraryto the stated intentions of policy makers, my baseline estimates suggest that implementing this policy would increaseaverageprices by 9%, making 87 % ofhospitals worseoff and decreasingtotal surplus by 0.06%. Device manufacturers, however, would see their profits increase by an average of 16%

Year: 2009
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