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on Industrial Organization |
| By: | Bo Cowgill; Andrea Prat; Tommaso Valletti |
| Abstract: | Brandeis (1914) hypothesized that firms with market power will also attempt to gain political power. To explore this hypothesis empirically, we combine data on mergers with data on lobbying expenditures and campaign contributions in the US from 1999 to 2017. We pursue two distinct empirical approaches: a panel event study and a differential exposure design. Both approaches indicate that mergers are followed by large and persistent increases in lobbying activity, both by individual firms and by industry trade associations. There is also weaker evidence for an association of mergers with campaign contributions (PACs). We also find that mergers impact the extensive margin of political activity, for example, by impacting companies’ choice to establish their first in-house lobbying teams and/or first corporate PAC. We interpret these results within an oligopoly model augmented with endogenous regulation and lobbying. |
| JEL: | L19 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33255 |
| By: | Yanlin Chen; Xianwen Shi; Jun Zhang |
| Abstract: | We study the welfare effects of price discrimination in a duopoly market with both captive and contested consumers. Using a unified information design approach, we characterize the best and worst market segmentations for producer surplus, consumer surplus, and social surplus. The firm-optimal segmentation, which divides the market into two nested segments, consistently harms consumers compared to uniform pricing. The consumer-optimal segmentation, which divides the market into a symmetric segment and a nested segment, sometimes leads to a Pareto improvement. Social surplus, if monotone in firm profit, is often maximized either by the firm-optimal or consumer-optimal segmentation. |
| Keywords: | Information Design, Market Segmentation, Firm-optimal Segmentation, Consumer-optimal Segmentation |
| JEL: | D43 D82 |
| Date: | 2025–01–16 |
| URL: | https://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-790 |
| By: | Edward Kong; Timothy Layton; Mark Shepard |
| Abstract: | Adverse selection is a classic market failure known to limit or “unravel”' trade in high-quality insurance and many other economic settings. While the standard theory emphasizes quality distortions, we argue that selection has another big-picture implication: it unravels competition among differentiated firms, leading to fewer surviving competitors—and in the extreme, what we call “un-natural” monopoly. Adverse selection pushes firms toward aggressive price cutting to attract price-sensitive, low-risk consumers. This creates a wedge between average and marginal costs that (like fixed costs in standard models) limits how may firms can profitably survive. We demonstrate this insight in a simple model of insurer entry and price competition, estimated using administrative data from Massachusetts' health insurance exchange. We find a large “selection wedge” of 20-30% of average costs, which (without corrective policies) unravels the market to monopoly. Our analysis suggests a surprising policy implication: interventions that limit price-cutting can improve welfare by supporting more entry, and ultimately lower prices. |
| JEL: | D4 I11 I13 L1 L40 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33187 |
| By: | Keith M. Drake; Thomas McGuire |
| Abstract: | Drug patent litigation settlements containing brand-to-generic “reverse payments” are a decades old antitrust concern that has been estimated to cost drug purchasers billions of dollars per year. Most estimates of the harm rely on the Federal Trade Commission’s calculation that such payments delay generic entry by 17 months, which is based on 15-20-year-old data. This paper takes a different approach, using stock price movements to quantify the harm. Costs to purchasers from an anticompetitive agreement are approximately equal to the brand firm’s increase in profits. If new profits are capitalized into stock prices, the change in value upon a settlement announcement can be used to estimate the new profit flows. We assembled a list of 64 settlements announced during 2014-2023. Although the announcements did not describe explicit forms of reverse payment, 16 announcements described terms that may transfer value to the generic firms. We classified these settlements as having an indication of reverse payment. Consistent with prior research, settlement announcements with no indication of reverse payment had no significant effect on the stock prices of brand firms implying that they tended to meet traders’ expectations. Stock prices increased by approximately 3.5%, on average, after settlements with indication of reverse payment, implying they increased brand profits by delaying generic entry. We estimate that these increases correspond to a total increase in purchaser spending of $2.9-$3.0 billion per year. Because our sample is not a full census of settlements, the industry-wide increase in spending may be closer to $7 billion per year. |
| JEL: | I11 L41 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33196 |
| By: | Dou, Liyu (School of Economics, Singapore Management University); KASTL, Jakub (Department of Economics, Princeton University, NBER and CEPR); LAZAREV, John (Stern Economics, New York University) |
| Abstract: | We develop a framework for quantifying delay propagation in airline networks that combines structural modeling and machine learning methods together to estimate causal objects of interest. Using a large comprehensive data set on actual delays and a model-selection algorithm (elastic net) we estimate a weighted directed graph of delay propagation for each major airline in the US and derive conditions under which the estimates of the propagation coefficients are causal. We use these estimates to decompose the airline performance into “luck” and “ability.” We find that luck may explain about 38% of the performance difference between Delta and American in our data. We further use these estimates to describe how network topology and other airline network characteristics (such as aircraft fleet heterogeneity) affect the expected delays. |
| Keywords: | Airline Networks; Shock Propagation; Elastic Net |
| JEL: | C50 L14 L93 |
| Date: | 2025–09–01 |
| URL: | https://d.repec.org/n?u=RePEc:ris:smuesw:2024_014 |
| By: | Haruo Kakehi (Graduate School of Economics, Keio University); Ryo Nakajima (Faculty of Economics) |
| Abstract: | This study shows how consumers’ brand preferences are related to professional experts’ behavior by investigating the role of pharmacists. Although the literature suggests that consumers are more willing to pay for brand-name products, our data reveal a puzzling scenario: some patients continue to choose nonbrand generic alternatives even when a brand-identical option (authorized generic) is available at the same price. We model both patients’ demand and pharmacies’ drug adoption decisions and demonstrate substantial variation in brand preferences across pharmacies using Japanese pharmacists’ dispensing data. Furthermore, our results indicate that differences in pharmacists’ medical management are important in shaping these preferences. |
| Keywords: | Authorized generic; Brand premiums; Generic pharmaceuticals; Pharmacist behavior; Medical management |
| JEL: | D12 I11 I18 L65 |
| Date: | 2025–01–16 |
| URL: | https://d.repec.org/n?u=RePEc:keo:dpaper:2025-001 |