Bargaining Ability and Competitive Advantage: Empirical Evidence from Medical Devices

In markets where buyers and suppliers negotiate prices, supplier costs, buyer willingnessto-pay, and competition (forces strategists often refer to as sources of bargaining power) determine only a range of 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 each product to be sold at the same price to all hospitals. Contrary to the stated intentions of policy makers, my baseline estimates suggest that implementing this policy would increase average prices by 9%, making 87% of hospitals worse off and decreasing total surplus by 0.06%. Device manufacturers, however, would see their profits increase by an average of 16%. Data for this research was generously provided by Millennium Research Group (www.mrg.net). Special thanks for the guidance and encouragement throughout the many phases of this research project go to my dissertation committee: John Asker, Adam Brandenburger, Allan Collard-Wexler, Michael Katz, and Bernie Yeung. I also benefited from discussions with Heski Bar-Isaac, Lúıs Cabral, Catherine de Fontenay, JP Eggers, Robin Lee, Pierre Thomas Leger, Hong Luo, Gabriel Natividad, Gonçalo Pacheco de Almeida, Ariel Pakes, Rob Salomon, Melissa Schilling, Gus Stuart, Larry White, Ali Yurukoglu, and seminar audiences at CCC 2009, the 2009 BPS Dissertation Consortium, and NYU’s Management and Economics Departments. Andy Cron, John Brumleve, Mark Bly, Rob Tumarkin, and many others have been helpful in teaching me about medical device manufacturing and sales. Physicians and administrators at NYU Medical Center and CGH, Sterling, IL were generous with their time and knowledge regarding hospital purchasing and the inner workings of a cardiac catheterization lab. Some industry background research was conducted while attending the Transcatheter Cardiovascular Therapeutics 2008 conference, which was made possible by the generosity of the Cardiovascular Research Foundation.