nep-ind New Economics Papers
on Industrial Organization
Issue of 2022‒08‒15
seven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Antitrust Law and Business Dynamism By Vaziri, M.
  2. Behavior-based Price Discrimination in the Domestic and International Mixed duopoly By Suzuka Okuyama
  3. Consumer Naivete and Competitive Add-on pricing on platforms By Ghosh, Meenakshi
  4. Market for Artificial Intelligence in Health Care and Compensation for Medical Errors By Chopard, Bertrand; Musy, Olivier
  5. A Note on the Regulation of Add-ons By Ghosh, Meenakshi
  6. The Value of Pharmacy Benefit Management By Casey B. Mulligan
  7. Market Power in the Argentine Liquid Fuels Wholesale Chain By M. T. Verónica Culós; M. Florencia Gabrielli; Marcos Herrera Gómez

  1. By: Vaziri, M.
    Abstract: In this paper, I study firms' strategic and anticompetitive behaviour, and the consequent role of antitrust law as a macroeconomic policy in promoting business dynamism. Over the past few decades, business dynamism has been declining in the US: firm entry has fallen, accompanied by a slowdown in the rate of productivity growth. Additionally, enforcement of antitrust law has been at historically low levels. Using firm-level and sector-level data from the US, I find that stronger antitrust enforcement is associated with higher entry and higher productivity growth but lower R&D investments. Next, I develop and structurally estimate a dynamic general equilibrium model with innovation and oligopolistic product market competition. The dynamic structure of the model allows rms to eliminate competition through strategic decision making. The model is calibrated to the recent US experience and quantitative exercises show that strengthening antitrust policies results in: (1) a higher firm entry rate, (2) a higher rate of productivity growth, (3) a larger labour share of GDP, and (4) a decline in the innovation rate. Overall, the model indicates that stronger antitrust policies are effective at restoring business dynamism and can deliver up to 16% higher welfare in consumption-equivalent terms. The improvement in welfare is mainly driven by an increase in the welfare of workers, without affecting the capitalists, suggesting that antitrust law has distributional implications, and therefore, has a potential role in reducing inequality.
    Date: 2022–07–18
  2. By: Suzuka Okuyama
    Abstract: This study investigates mixed markets in which a social welfare-maximizing public firm and a private firm engage in behavior-based price discrimination (BBPD). Total of two cases are considered: one where domestic shareholders completely own the private firm and one where foreign shareholders completely own it. In the domestic mixed duopoly, BBPD is irrelevant from the viewpoint of social welfare. This is because poaching does not occur. In the international mixed duopoly, BBPD improves domestic social welfare, as it allows the public firm to lower its poaching price. In both cases, privatization is more undesirable under BBPD than uniform pricing.
    Date: 2022–07
  3. By: Ghosh, Meenakshi
    Abstract: Two sellers trade vertically and horizontally differentiated goods on a platform which charges them a commission fee. Some consumers are naive and do not observe, or consider, add-on prices until after they commit to buying the base good from a seller. We address the following questions. First, how do consumer naivete and costs asymmetries (arising from differences in fees) influence pricing strategies. Second, we examine the welfare loss arising from sub-optimal decisions made by naive consumers who buy the bundle, but fail to factor in its total price at the outset. Third, how does naivete affect seller and platform payoffs.
    Keywords: add-on pricing, consumer naivete, cost asymmetry, horizontal differentiation, vertical differentiation, platform fee, cost pass-through
    JEL: L1 L11
    Date: 2022–06–01
  4. By: Chopard, Bertrand; Musy, Olivier
    Abstract: We study the market for AI systems that are used to help to diagnose and treat diseases, reducing the risk of medical error. Based on a two-firm vertical product differentiation model, we examine how, in the event of patient harm, the amount of the compensation payment, and the division of this compensation between physicians and AI system producers affects both price competition between firms, and the quality (accuracy) of AI systems. One producer sells products with the best-available accuracy. The second sells a system with strictly lower accuracy at a lower price. Specifically, we show that both producers enjoy a positive market share, so long as some patients are diagnosed by physicians who do not use an AI system. The quality of the system is independent of how any compensation payment to the patient is divided between physicians and producers. However, the magnitude of the compensation payment impacts price competition. Increased malpractice pressure leads to lower vertical differentiation, thus encouraging price competition. We also explore the effect of compensation on firms’ profits at equilibrium. We conclude by discussing our results with respect to the evolution of the civil liability regime for AI in healthcare.
    Keywords: Artificial Intelligence, Diagnostic, Duopoly, Liability, Physician, Compensation
    JEL: I11 K13 K41 L13
    Date: 2022–06–09
  5. By: Ghosh, Meenakshi
    Abstract: We model a situation where a seller trades a base good, and a bundle of higher quality comprising of the base good with an add-on, through an intermediary which charges a flat commission fee each time it makes a sale. In addition, the add-on can also be bought elsewhere, i.e. from a different provider, on a stand-alone basis. Apart from differences in valuations of quality and their distance from the seller, consumers differ in their levels of sophistication. Specifically, we assume that there is a fraction of consumers who are naive and either unaware that add-ons can be purchased separately from a different provider, or unwilling to deviate (de-select) from the options that have been set for them by default by a seller. This paper examines the impact of regulation (proposed, for instance, by the Financial Conduct Authority in the UK), that requires intermediaries to prompt consumers regarding the availability of stand-alone alternatives. We find that, ironically, regulation that seeks to protect the interests of the naive consumers may sometimes be detrimental to their welfare.
    Keywords: add-on pricing, consumer naivete, regulation, platform fee, cost pass-through
    JEL: L11 L15
    Date: 2022–06–24
  6. By: Casey B. Mulligan
    Abstract: In theory, equilibrium profits for drug patent holders would not involve significant restraints on production and patient utilization if the market had a mechanism for two-part pricing (Oi 1971) or quantity commitments (Murphy, Snyder, and Topel 2014). In fact, patent expiration has little effect on drug utilization especially when those drugs are delivered through insurance plans. This paper provides a quantitative model consistent with the theory and evidence in which pharmacy benefit management on behalf of insurance plans serves these and other purposes in both monopoly and oligopoly provider settings. Calibrating the model to the U.S. market, I conclude that pharmacy benefit management is worth at least $145 billion annually beyond its resource costs. PBM services add at least $192 billion annually in value to society compared to a manufacturer price-control regime. Requiring all PBM services to be self-provided by plan sponsors would forgo about 40 percent of the net value of PBM services largely by increasing management costs. Due to changes in the incidence of PBM services over the drug life cycle, the services encourage innovation even though they reduce the profits of incumbent manufacturers.
    JEL: D43 D71 I11 I13 L14
    Date: 2022–07
  7. By: M. T. Verónica Culós (Universidad Nacional de Cuyo); M. Florencia Gabrielli (Universidad Nacional de Cuyo/CONICET); Marcos Herrera Gómez (IELDE-UNSa/CONICET)
    Abstract: The liquid fuels market in Argentina is characterized by a high level of concentration, especially in local geographic areas. This paper studies the demand of the liquidfuels wholesale chain in Argentina, using the discrete choice approach, based on the premise that different firms offer differentiated goods, by virtue of the intrinsic characteristics of the good, and that such differentiation gives them the power to set prices above marginal production costs. The difference between prices and marginal costs determines the firm’s market power. Using a novel dataset, we provide new empirical evidence that quantifies market power across firms and regions.
    Keywords: Liquid Fuels; Market Power; Product Differentiation.
    JEL: C52 L13 L71
    Date: 2022–07

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