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 behavior. 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 or leaves unchanged the intensity of price competition among sellers, which contrasts with the conventional wisdom that product differentiation softens competition.