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Bargaining Microfoundations for Productivity Dispersion


  • John Thanassoulis


This paper analyses the implications of bargaining between buyers and sellers on the competitive outcome in a homogeneous good industry. Bargaining creates a competitive equilibrium in which some inefficient sellers coexist with efficient ones leading to productivity dispersion. Rival cost uncertainty then creates an endogenous distribution of productivities which shrinks if rival numbers grow - exactly paralleling current empirical findings. The ability to bargain results in list price dispersion but transaction price uniformity. The bargaining models is not observationally equivalent to Bertrand pricing with product differentiation as positive mark-ups are predicted as idiosyncratic seller cost shocks become small. This and other predictions of the baragining model of competition are assessed against the empirical evidence. The insights are robust to search costs with a nonsequential search stratgegy where a pure strategy (no sales) price equilibrium is found. Further, the results extend to markets without bargaining if sellers post price matching guarantees.

Suggested Citation

  • John Thanassoulis, 2006. "Bargaining Microfoundations for Productivity Dispersion," Economics Series Working Papers 262, University of Oxford, Department of Economics.
  • Handle: RePEc:oxf:wpaper:262

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    Bargaining; List Prices; Transaction Prices; Price-matching Guarantees; Productivity Dispersion; Trade Liberalization.;

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation

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