List Prices, Bargaining and Resultant Productivity Diffusion Delay
List prices are not completely credible as take it or leave it prices: buyers are able to seek reductions by bargaining with firms. We show that this realisation leads to the existence of a critical threshold number of competitors in an industry which depends on fundamentals. In industries with fewer competitors than the critical level, there is productivity diffuson delay: low and high cost firms coexist, list prices have no information value and transaction price dispersion exists. Above this critical number of competitors, efficient firms price to drive the high cost firms from the market: productivity gains diffuse to consumers and list prices now carry cost information. Prices never fall to the Bertrand floor however. All of these results are in close keeping with, and provide an explanation for empirical results showing productivity dispersion persistence and the explanatory power of having 5 competitors or more (Nickell 1996).
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