A non-trivial fraction of people cannot afford to buy pharmaceutical products at unregulated market prices. This paper analyses the public insurance of a patent-protected pharmaceutical product in terms of price controls and socially optimal third-degree price discrimination. First, the paper characterizes the Ramsey pricing rule in the case where the producer price has to cover the R&D costs of the firm and patients’ pharmaceutical expenditures are not covered by health insurance. Subsequently, conditions for a welfare increasing departure from the Ramsey pricing rule are stated in terms of price regulation and health insurance coverage. Unlike the earlier views expressed, the increased consumption of the pharmaceutical is shown to be welfare increasing. In the spirit of the Rawlsian view, a criterion for vertical equity is examined as an optimal means-tested health insurance. In this scheme, the regulator chooses a higher insurance coverage for individuals whose income is below an endogenously determined income threshold. The means-tested insurance scheme improves social welfare but also yields very equal market outcomes.
{"title":"Pricing the Pharmaceuticals When the Ability to Pay Differs: Taking Vertical Equity Seriously","authors":"V. Kanniainen, J. Laine, I. Linnosmaa","doi":"10.2139/ssrn.3523535","DOIUrl":"https://doi.org/10.2139/ssrn.3523535","url":null,"abstract":"A non-trivial fraction of people cannot afford to buy pharmaceutical products at unregulated market prices. This paper analyses the public insurance of a patent-protected pharmaceutical product in terms of price controls and socially optimal third-degree price discrimination. First, the paper characterizes the Ramsey pricing rule in the case where the producer price has to cover the R&D costs of the firm and patients’ pharmaceutical expenditures are not covered by health insurance. Subsequently, conditions for a welfare increasing departure from the Ramsey pricing rule are stated in terms of price regulation and health insurance coverage. Unlike the earlier views expressed, the increased consumption of the pharmaceutical is shown to be welfare increasing. In the spirit of the Rawlsian view, a criterion for vertical equity is examined as an optimal means-tested health insurance. In this scheme, the regulator chooses a higher insurance coverage for individuals whose income is below an endogenously determined income threshold. The means-tested insurance scheme improves \u0000social welfare but also yields very equal market outcomes.","PeriodicalId":18516,"journal":{"name":"Microeconomics: Production","volume":"373 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-11-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"74870769","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We investigate the impact of search order distortion, the act of steering consumers to search for a particular product first, by a vertically integrated platform that intermediates the products of a third-party seller as well as its own product. We show that the effects of search order distortion on prices and welfare depend on the search costs and commission rates. Even though a vertical separation policy could improve welfare through lower prices, a policy that only prohibits search order distortion could harm welfare and consumer surplus when commission rates are high. This result sheds lights on a potential risk of the policy that requires dominant platforms to be neutral while allowing them to sell on the marketplaces.
{"title":"Dual Role Platforms and Search Order Distortion","authors":"Yuta Kittaka, Susumu Sato","doi":"10.2139/ssrn.3736574","DOIUrl":"https://doi.org/10.2139/ssrn.3736574","url":null,"abstract":"We investigate the impact of search order distortion, the act of steering consumers to search for a particular product first, by a vertically integrated platform that intermediates the products of a third-party seller as well as its own product. We show that the effects of search order distortion on prices and welfare depend on the search costs and commission rates. Even though a vertical separation policy could improve welfare through lower prices, a policy that only prohibits search order distortion could harm welfare and consumer surplus when commission rates are high. This result sheds lights on a potential risk of the policy that requires dominant platforms to be neutral while allowing them to sell on the marketplaces.","PeriodicalId":18516,"journal":{"name":"Microeconomics: Production","volume":"91 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-10-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"85917752","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
What is the role of information disclosure for a multi-product seller? We study the optimal combination of selling mechanism and information disclosure policy for a profit-maximizing monopolist with products of distinct qualities. Provided that the buyer has unit demand and multiplicative valuation, we show it is optimal for the seller to set a posted price for each product and reveal the one of highest realized quality. The key insight is that information disclosure can facilitate surplus extraction when there are decent alternatives, while no disclosure is optimal with a single product. In both cases, a posted price mechanism is optimal.
{"title":"Monopoly, Product Quality and Information Disclosure","authors":"Fanqi Shi, Yutong Zhang","doi":"10.2139/ssrn.3753535","DOIUrl":"https://doi.org/10.2139/ssrn.3753535","url":null,"abstract":"What is the role of information disclosure for a multi-product seller? We study the optimal combination of selling mechanism and information disclosure policy for a profit-maximizing monopolist with products of distinct qualities. Provided that the buyer has unit demand and multiplicative valuation, we show it is optimal for the seller to set a posted price for each product and reveal the one of highest realized quality. The key insight is that information disclosure can facilitate surplus extraction when there are decent alternatives, while no disclosure is optimal with a single product. In both cases, a posted price mechanism is optimal.","PeriodicalId":18516,"journal":{"name":"Microeconomics: Production","volume":"61 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"76656111","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Output and input market distortions manifest as wedges in the firm's first order conditions. The production approach to markup estimation recovers the markup wedge using the output elasticity for a variable and undistorted input. We show that using the revenue elasticity for any variable input, undistorted or distorted, instead recovers that input's wedge. Our result has two important implications. First, existing findings using the revenue elasticity should be reinterpreted as evidence of input, rather than output, market distortions. Second, future work can use the production approach to study input wedges even when only revenue elasticities are known.
{"title":"Production Approach Markup Estimators Often Measure Input Wedges","authors":"Arshia Hashemi, I. Kirov, James Traina","doi":"10.2139/ssrn.3934534","DOIUrl":"https://doi.org/10.2139/ssrn.3934534","url":null,"abstract":"Output and input market distortions manifest as wedges in the firm's first order conditions. The production approach to markup estimation recovers the markup wedge using the output elasticity for a variable and undistorted input. We show that using the revenue elasticity for any variable input, undistorted or distorted, instead recovers that input's wedge. Our result has two important implications. First, existing findings using the revenue elasticity should be reinterpreted as evidence of input, rather than output, market distortions. Second, future work can use the production approach to study input wedges even when only revenue elasticities are known.","PeriodicalId":18516,"journal":{"name":"Microeconomics: Production","volume":"os-46 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"87241685","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Firms that own platforms often actively manage firms that offer products through the platform (i.e., platform complementors). To manage complementors, platform owners tend to have fewer tools available at their disposal relative to traditional organizations. Prior work has started examining how platform owners achieve both value creation and appropriation using novel tools such as product endorsements. We extend the literature by developing a theoretical framework on the role of direct network effects of the products introduced through the platform. We test our predictions using a detailed dataset of game apps introduced on the Apple’s app store and examine which apps received Apple’s prestigious Editors’ Choice Awards given at the time of introduction. We find that apps with network effects are more likely to receive the award. This likelihood increases when the app is introduced by a developer with a larger market share but is lower if the app was introduced in a concentrated segment. The likelihood decreases further if the app is introduced in a concentrated segment by a developer that holds a larger market share. We also observe that in concentrated segments, the “challenger” developers have a higher likelihood of receiving the award relative to
{"title":"Successful, but not Too Much: Managing Platform Complementors in the Presence of Network Effects","authors":"Shiva Agarwal, Cameron D. Miller, Martin Ganco","doi":"10.2139/ssrn.3933965","DOIUrl":"https://doi.org/10.2139/ssrn.3933965","url":null,"abstract":"Firms that own platforms often actively manage firms that offer products through the platform (i.e., platform complementors). To manage complementors, platform owners tend to have fewer tools available at their disposal relative to traditional organizations. Prior work has started examining how platform owners achieve both value creation and appropriation using novel tools such as product endorsements. We extend the literature by developing a theoretical framework on the role of direct network effects of the products introduced through the platform. We test our predictions using a detailed dataset of game apps introduced on the Apple’s app store and examine which apps received Apple’s prestigious Editors’ Choice Awards given at the time of introduction. We find that apps with network effects are more likely to receive the award. This likelihood increases when the app is introduced by a developer with a larger market share but is lower if the app was introduced in a concentrated segment. The likelihood decreases further if the app is introduced in a concentrated segment by a developer that holds a larger market share. We also observe that in concentrated segments, the “challenger” developers have a higher likelihood of receiving the award relative to","PeriodicalId":18516,"journal":{"name":"Microeconomics: Production","volume":"73 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-09-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"88309617","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
J. Felipe, J. Mccombie, Aashish Mehta, Donna Faye Bajaro
The possible endogeneity of labor and capital in production functions, and the consequent bias of the estimated elasticities, has been discussed and addressed in the literature in different ways since the 1940s. This paper revisits an argument first outlined in the 1950s, which questioned production function estimations. This argument is that output, capital and employment, are linked through a distribution accounting identity, a key point that the recent literature has overlooked. This identity can be rewritten as a form that resembles a production function (Cobb-Douglas, CES, translog). We show that this happens because the data used in empirical exercises are value (monetary) data, not physical quantities. The argument has clear predictions about the size of the factor elasticities and about what is commonly interpreted as the bias of the estimated elasticities. To test these predictions, we estimate a typical Cobb-Douglas function using five estimators and show that: (i) the identity is responsible for the fact that the elasticities must be the factor shares; (ii) the bias of the estimated elasticities (i.e., departure from the factor shares) is, in reality, caused by the omission of a term in the identity. However, unlike in the standard omitted-variable bias problem, here the omitted term is known; and (iii) the estimation method is a second-order issue. Estimation methods that theoretically deal with endogeneity, including the most recent ones, cannot solve this problem. We conclude that the use of monetary values rather than physical data poses an insoluble problem for the estimation of production functions. This is, consequently, far more serious than any supposed endogeneity problems.
{"title":"Production Function Estimation: Biased Coefficients and Endogenous Regressors, or a Case of Collective Amnesia?","authors":"J. Felipe, J. Mccombie, Aashish Mehta, Donna Faye Bajaro","doi":"10.2139/ssrn.3857565","DOIUrl":"https://doi.org/10.2139/ssrn.3857565","url":null,"abstract":"The possible endogeneity of labor and capital in production functions, and the consequent bias of the estimated elasticities, has been discussed and addressed in the literature in different ways since the 1940s. This paper revisits an argument first outlined in the 1950s, which questioned production function estimations. This argument is that output, capital and employment, are linked through a distribution accounting identity, a key point that the recent literature has overlooked. This identity can be rewritten as a form that resembles a production function (Cobb-Douglas, CES, translog). We show that this happens because the data used in empirical exercises are value (monetary) data, not physical quantities. The argument has clear predictions about the size of the factor elasticities and about what is commonly interpreted as the bias of the estimated elasticities. To test these predictions, we estimate a typical Cobb-Douglas function using five estimators and show that: (i) the identity is responsible for the fact that the elasticities must be the factor shares; (ii) the bias of the estimated elasticities (i.e., departure from the factor shares) is, in reality, caused by the omission of a term in the identity. However, unlike in the standard omitted-variable bias problem, here the omitted term is known; and (iii) the estimation method is a second-order issue. Estimation methods that theoretically deal with endogeneity, including the most recent ones, cannot solve this problem. We conclude that the use of monetary values rather than physical data poses an insoluble problem for the estimation of production functions. This is, consequently, far more serious than any supposed endogeneity problems.","PeriodicalId":18516,"journal":{"name":"Microeconomics: Production","volume":"31 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-09-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"73097945","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Konstantinos Charistos, Ioannis N. Pinopoulos, Panagiotis Skartados
We examine the effects of passive forward ownership on the sustainability of upstream collusion. We consider a homogeneous Cournot duopoly with competing vertical chains. In one chain, the upstream firm has non-controlling partial ownership over its downstream exclusive client. We find that passive forward ownership hinders upstream collusion; the higher is the degree of ownership, the more difficult it is for upstream collusion to be sustained. The driving force behind our result is that a higher degree of passive forward ownership decreases collusive profits of the unintegrated upstream firm.
{"title":"Passive forward ownership and upstream collusion","authors":"Konstantinos Charistos, Ioannis N. Pinopoulos, Panagiotis Skartados","doi":"10.2139/ssrn.3924078","DOIUrl":"https://doi.org/10.2139/ssrn.3924078","url":null,"abstract":"We examine the effects of passive forward ownership on the sustainability of upstream collusion. We consider a homogeneous Cournot duopoly with competing vertical chains. In one chain, the upstream firm has non-controlling partial ownership over its downstream exclusive client. We find that passive forward ownership hinders upstream collusion; the higher is the degree of ownership, the more difficult it is for upstream collusion to be sustained. The driving force behind our result is that a higher degree of passive forward ownership decreases collusive profits of the unintegrated upstream firm.","PeriodicalId":18516,"journal":{"name":"Microeconomics: Production","volume":"45 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-09-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"79347114","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We study multi-unit auctions for homogenous goods in a private value setting where bidders have non-quasilinear preferences. Several recent impossibility results study this setting and find there is no mechanism that retains the Vickrey auction’s desired incentive and efficiency properties without quasilinearity. While a fully efficient mechanism is impossible, we show that any undominated outcome of the Vickrey auction has a negligible inefficiency when bidder wealth effects are sufficiently small. In order to show this, we first place bounds on undominated bid behavior in the Vickrey auction when bidders have non-quasilinear preferences. We use (Marshallian) deadweight loss as our inefficiency metric, and we derive a tight upper bound on the inefficiency associated with the Vickrey auction in terms of the degree of bidder wealth effects. As wealth effects diminish, the bound continuously approaches zero. Other common multi-unit auction formats do not have this property, and their worst-case inefficiencies are higher than that of the Vickrey auction.
{"title":"Quantifying the Inefficiency of Multi-unit Auctions for Normal Goods","authors":"Brian Baisa, Simon Essig Aberg","doi":"10.2139/ssrn.3912928","DOIUrl":"https://doi.org/10.2139/ssrn.3912928","url":null,"abstract":"We study multi-unit auctions for homogenous goods in a private value setting where bidders have non-quasilinear preferences. Several recent impossibility results study this setting and find there is no mechanism that retains the Vickrey auction’s desired incentive and efficiency properties without quasilinearity. While a fully efficient mechanism is impossible, we show that any undominated outcome of the Vickrey auction has a negligible inefficiency when bidder wealth effects are sufficiently small. In order to show this, we first place bounds on undominated bid behavior in the Vickrey auction when bidders have non-quasilinear preferences. We use (Marshallian) deadweight loss as our inefficiency metric, and we derive a tight upper bound on the inefficiency associated with the Vickrey auction in terms of the degree of bidder wealth effects. As wealth effects diminish, the bound continuously approaches zero. Other common multi-unit auction formats do not have this property, and their worst-case inefficiencies are higher than that of the Vickrey auction.","PeriodicalId":18516,"journal":{"name":"Microeconomics: Production","volume":"10 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-08-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"77015882","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We document dispersion in firms’ costs to advertise nationally, finding that advertisers with established relationships receive favorable prices for equivalent ad inventories.
{"title":"Price Dispersion and Legacy Discounts in the National Television Advertising Market","authors":"Sylvia Hristakeva, J. Mortimer","doi":"10.2139/ssrn.3911469","DOIUrl":"https://doi.org/10.2139/ssrn.3911469","url":null,"abstract":"We document dispersion in firms’ costs to advertise nationally, finding that advertisers with established relationships receive favorable prices for equivalent ad inventories.","PeriodicalId":18516,"journal":{"name":"Microeconomics: Production","volume":"39 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-08-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"83579337","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In recent years decentralized Ride Hailing companies have gained significant market share at the expense of vertically-integrated Taxi companies. Yet, Ride Hailing companies also experienced substantial setbacks, and it is not clear what the endgame between these two competing business models will be. Further, emerging self-driving car technologies, which leads to another form of a vertically-integrated ride service poses further questions on how the industry will shape in the future. In this paper, we aim to gain insights about the evolution and the future of ride services under these two distinct business approaches. We model and analyze competition and entry between Vertically Integrated (VI) and decentralized Ride Hailing (RH) firms. Although the VI model has an advantage for being centralized, we find that when customers are patient, in competition, the RH firm predominantly gains the upper hand in the market with lower delays and higher prices, as well as higher market share and profits even if it has a cost disadvantage. Surprisingly, entry may reduce total vehicle supply, and tends to increase customer waiting times. When customers are impatient, the entry of an inefficient VI firm may even lead to a decrease in social welfare despite introducing competition. Our results provide insights into how decentralized Ride Hailing companies may have a strategic advantage to dominate the market due to their agility and the structure of their business model, and how this can sometimes hurt service quality. Conversely, regulators should also be cautious about subsidizing inefficient Taxi services or self-driving ride services with costly technologies.
{"title":"Evolution of Ride Services: From Taxicabs to Ride Hailing and Self-Driving Cars","authors":"Dae-Hwan Noh, T. Tunca, Yi Xu","doi":"10.2139/ssrn.3903493","DOIUrl":"https://doi.org/10.2139/ssrn.3903493","url":null,"abstract":"In recent years decentralized Ride Hailing companies have gained significant market share at the expense of vertically-integrated Taxi companies. Yet, Ride Hailing companies also experienced substantial setbacks, and it is not clear what the endgame between these two competing business models will be. Further, emerging self-driving car technologies, which leads to another form of a vertically-integrated ride service poses further questions on how the industry will shape in the future. In this paper, we aim to gain insights about the evolution and the future of ride services under these two distinct business approaches. We model and analyze competition and entry between Vertically Integrated (VI) and decentralized Ride Hailing (RH) firms. Although the VI model has an advantage for being centralized, we find that when customers are patient, in competition, the RH firm predominantly gains the upper hand in the market with lower delays and higher prices, as well as higher market share and profits even if it has a cost disadvantage. Surprisingly, entry may reduce total vehicle supply, and tends to increase customer waiting times. When customers are impatient, the entry of an inefficient VI firm may even lead to a decrease in social welfare despite introducing competition. Our results provide insights into how decentralized Ride Hailing companies may have a strategic advantage to dominate the market due to their agility and the structure of their business model, and how this can sometimes hurt service quality. Conversely, regulators should also be cautious about subsidizing inefficient Taxi services or self-driving ride services with costly technologies.","PeriodicalId":18516,"journal":{"name":"Microeconomics: Production","volume":"192 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-08-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"83068488","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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