I revisit a regulator’s problem when a monopolist has superior knowledge of either cost or demand which is responsive to unverifiable quality. Many markets possessing unverifiable quality (e.g., health care services and education) often contain a mix of for-profit and not-for profit firms, therefore the firm’s objective is modeled as a combination of profit- and output-maximization. In contrast to the earlier literature, the firm’s ability to extract information rents in combination with consumers’ responsiveness to quality may result in either an under- or over-supply of the good relative to first-best levels. At the extreme, however, the firm’s informational advantage may be completely attenuated when consumer’s price elasticity is eliminated and the firm is an output-maximizer. The findings provide new insights into how the strategic response of the firm and consumers to the regulator’s payment policy may lead to market distortions and what form these distortions take.

A theoretical model of pharmaceutical sample dispensation is developed providing insights into the strategic use and welfare effects of sampling. Consumer’s are rational and have an idiosyncratic match with the drug. A firm’s sampling strategy is found to depend on the degree of information. With symmetric information the sampling decision is not monotonic in a drug’s efficacy. With asymmetric information, however, sample dispensation acts as a signal of efficacy and is monotonic. The signaling effect also causes the firm to dispense samples for lower efficacies than optimal with symmetric information. The circumstances causing sampling to increase consumer welfare are explored.

We examine the effect of hospital system membership on a hospital’s negotiated price with a managed care organization (MCO). Previous research has explored whether system hospitals secure higher reimbursement rates by exploiting local market concentration to increase their value to MCO networks. However, it is also possible that system hospitals are able to leverage their system membership in the bargaining game in order to extract a higher percentage of the value they add to MCO networks. Our findings reveal substantial differences in bargaining power across hospitals with varying characteristics. We show that these differences are generally responsible for more of the observed price gap between system and non-system hospitals than are differences linked to relative concentration. In addition, we find that bargaining power is strongly related to the size of the hospital system outside of the local patient market suggesting that focusing only on how system formation and growth alters the structure of the local patient market may be misleading. The findings also highlight the importance of explicitly modeling the bargaining process when evaluating price formation in negotiated-price markets more generally.

Demand Estimates.xlsx

I analyze the countervailing incentives the insurer and patient place on the physician when making her treatment decision. Physicians can choose one of two possible treatments, the cost of which is a function of the patient’s illness severity or type. Patients have a treatment preference based on their type and are responsive to physician treatment practices. This response combined with the patients’ moral hazard exerts a pressure on physicians to over-treat relative to the first-best level. Furthermore, increasing competitive pressure by improving the information of patients or adding physicians results in over treatment with the same payments. However, an insurer can induce the first-best with payments that are a function of the degree of market competitiveness. Introducing noisy signals of illness type and the possibility for diagnostic testing can eliminate the insurer’s ability to induce the first-best treatment practice using payment rules only.