Horizontal Product Differentiation in Auctions and Multilateral Negotiations

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\u27s influence on sellers\u27 pricing behaviour. 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\u27s surplus-maximizing trading partner. Further analysis shows that introducing product differentiation increases the intensity of price competition among sellers, which contrasts with the conventional wisdom that product differentiation softens competition