Working papers:

• Utilizing Free Samples in the Prescription Drug Market (Last updated: June 28th, 2010)
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  We develop a theoretical model of pharmaceutical sampling to provide insight into the strategic use and welfare effects of free drug samples. Consumers have a heterogeneous degree of illness and consumer-to-drug matches are idiosyncratic. A firm dispenses samples to mitigate the consumers’ risk, which increases profit by expanding the market and/or allowing it to set a higher price. We find that the firm’s sampling strategy varies with the state of information. When the efficacy of the drug is commonly known the firm’s sampling decision is not monotonic in the efficacy. However, when the efficacy is not commonly known, the sampling decision acts as a signal of the efficacy and is monotonic. Moreover, because of the signaling effect, the firm dispenses samples for lower efficacies than is optimal when information is symmetric. The effect on consumer surplus depends on the welfare gains generated by the market-expansion effect of sampling.
• Regulating a Monopolist with Unverifiable Quality (Last updated: April 12th, 2010)
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  We analyze the optimal regulatory policies for a monopolist when it has superior knowledge of either cost or demand and demand is affected by unverifiable quality. In this setting of unobservable output and costs, the regulator is restricted to using a two-part tariff as policy instrument. The optimal payment policies for a marketed and non-marketed good as well as a for-profit and not-for-profit firm are derived and compared. We show how the strategic responses to the regulatory policy of both the consumers and firm determine the degree of distortion from the socially optimal. The highest distortion occurs with a marketed good and for-profit firm whereas a firm’s informational advantage may be completely attenuated with a nonmarketed good and not-for-profit firm. Furthermore we find that some previous results in the literature are not robust to the inclusion of quality.

Works in progress:

• Hospital Systems and Market Power: Evidence from California (with Matt Lewis)
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  We examine the effect of hospital system membership on the bargaining outcome between a hospital and a managed care organization (MCO). It has been previously documented in the literature that system hospitals receive a higher payment than non-system hospitals from MCOs. However it is unclear if this difference occurs because system membership strengthens a hospital’s bargaining position, because system membership enhances the value of a hospital to patients, or because of some combination of these two effects. We use data from California to determine the cause of the higher payment by decomposing the effect of system membership into value-added and bargaining-power effects. We find that system membership significantly increases the bargaining power of a member hospital, but only when it has a partner within the same patient market. System membership is found to have a strong value-added effect for for-profit hospitals, but slightly decreases the consumer value of a non-profit hospital. We additionally find that a hospital’s type of control (for-profit, nonprofit), physician arrangements, and other characteristics can have a significant effect on its bargaining power.
• Procurement Contracting with Cost Uncertainty