This article studies price discrimination by a seller who uses data on observables that buyers can control (or manipulate) at a cost. If the seller's discriminatory prices are offered covertly, equilibrium market segmentation is always coarse, resulting in limited price discrimination. In contrast, if prices must be transparently posted, every buyer pays a personalized price in equilibrium, though this does not always reduce buyer or social welfare. The analysis sheds new light on calls for transparency in how sellers utilize consumer data to customize prices and highlights potential issues with assessing welfare using (only) observed prices, pricing conduct, and market coverage.
In the presence of adverse selection, mergers can increase welfare through a reduction in inefficient sorting. I characterize the sorting externality internalized between merging firms in a tractable discrete choice model. Mergers benefit consumers when the firms are small, willingness to pay is moderately increasing in cost, and consumer costs are skewed. Applying the model to the non-group health insurance market, 13% of potential mergers would improve consumer surplus. In markets where the sorting distortion exceeds $5 per person, nearly one-third of mergers improve consumer surplus, highlighting the importance of considering adverse selection in merger evaluation.
The energy transition from coal to gas is reshaping the power sector to rely more on gas generation, which is cleaner but has more variable input costs. Using counterfactual analysis, I study the competitive effects of this transition, by considering several transition paths that differ in the types of firms involved in retiring coal plants and investing in gas plants. I show that the variable nature of the marginal cost of gas generation creates an environment in which market power could increase after the transition. However, the transition's impact on competition depends on the characteristics of the firms investing in new gas generation; the adverse impact is mitigated under a well-planned transition that leads to a more competitive industry structure.
We study a two-period learning model where a sequentially rational regulator builds a reputation for strict enforcement and self-interested firms test the regulator's enforcement propensity through their misconduct. In the transparent setting, where misconduct and enforcement are observable between the firms, the regulator's reputation concern endogenously creates positive or negative enforcement externalities between the firms. When the reputation concern is strong, the enforcement externalities are negative and dominate the information externalities, encouraging misconduct. Otherwise, both externalities are positive and deter misconduct. Although a strong reputation always benefits the regulator in the opaque setting, it often backfires in a transparent setting.
This article provides a full characterization of the competitive effects of horizontal mergers in the Cournot model with heterogeneous firms and constant marginal costs. We show that price effects depend only on the smaller merging firm's market share and the number of firms but are independent of the distribution of market shares among other firms. Standard concentration measures, instead, are often misleading. We also provide simple-yet general-closed-form solutions for merger effects based on pre-merger parameters. Moreover, we extend the model to study the combination of output and input market power and relate our results to the Merger Guidelines.
We study the market effects of sponsored search auctions for advertising space on searches for brands. In our model, firms simultaneously choose the price of their product and the bids for the advertising auctions triggered by their own and rivals' brand keywords search. In any symmetric equilibrium, each firm wins its own keyword auction, and relative to a no-ads benchmark, online advertising raises the winning brand's marginal cost and ultimately market prices. Only in an environment with strong initial asymmetries do we find that brand advertising might be beneficial.
We study the optimal design of a monopoly platform that interacts with heterogeneous firms and consumers who face uncertainty about product values and prices. Consumers search randomly among firms recommended by the platform. The platform designs a menu of contracts tailored to different firm types and allocates consumer visits across these firms. We show that the optimal platform design creates a "superstar effect," whereby high-type firms capture a disproportionately large market share, and improves consumer welfare relative to the no-design benchmark.
Unobserved objective output quality complicates the analysis of firm productivity and demand because higher-quality products entail higher costs but offer greater consumption benefits. Using a panel of firms with output quality data, we decompose quantity-based productivity into fundamental productivity and the costs of quality, and separate the demand residual into fundamental demand and quality benefits. Fundamental demand accounts for most revenue variation, whereas quality's revenue-enhancing benefits are largely offset by its costs. During the 2008 global financial crisis, shifts in quality diverged from changes in fundamental productivity and demand, highlighting the role of quality in assessing firm and industry performance.
In this article, we examine the importance of individual physicians in explaining the significant variation in prescription drug spending in Medicare Part D. By tracking prescribing behavior before and after physician relocations, we find that movers' prescribing converges toward the average of their new location. However, this convergence is far from complete, highlighting the importance of idiosyncratic physician-specific factors. Overall, these physician-specific factors explain about 60 to 70 percent of the cross-sectional variation in prescription drug spending, suggesting that physicians are one of the most important supply-side determinants of this variation. We investigate several potential mechanisms behind this partial convergence.
This article investigates the influence of technological ownership on pricing strategies and productive efficiency. Our motivation comes from the evolving landscape of electricity markets where firms are transitioning from diversified to specialized portfolios, focusing on renewable energy or fossil fuels. Our theoretical model demonstrates that diversified firms compete more vigorously than their specialized counterparts. Conversely, specialized firms exhibit higher productive efficiency but only when thermal sources dominate. The magnitude of our theoretical predictions is assessed through simulations using data from the Spanish electricity market. Methodologically, our analysis offers novel insights for studying multi-unit auctions with cost heterogeneity and privately known capacities.
This article considers an auction model in which a seller's choice of reserve price signals her private information about the object's quality. We show that the signaling incentive would lower the seller's payoff and the probability of sale. We estimate the model using a novel dataset from a large online auto auction platform. Counterfactual simulations suggest that a secret reserve price could shut down the signaling incentive and improve both the seller's payoff and the probability of sale, which supports the prevalent use of secret reserve prices in practice.
We analyze a model where consumers sequentially search experts for treatment recommendations and prices, facing either zero or a positive search cost, whereas experts simultaneously compete in these two dimensions. In equilibrium, experts may "cheat" by overstating the severity of a consumer's problem and recommending an unnecessary treatment, prices follow distributions depending on the problem type and the treatment, and consumers employ Bayesian belief updating about their problem types during search. Paradoxically, as search cost decreases, expert cheating and prices can both increase stochastically. However, if search cost is sufficiently small, competition will force all experts to behave honestly.
The trade-off between market power and efficiency gains is central to antitrust analyses of mergers, but empirical evidence quantifying efficiencies remains limited. Using transaction-level data from U.S. freight railroads (1985-2005), this article quantifies merger-induced cost efficiencies, driven mainly by eliminating inter-railroad interchange costs and reoptimization of routing and resource allocation within integrated networks. I develop a spatial equilibrium model with oligopolistic competition to assess equilibrium merger effects. Counterfactual analyses show mergers reduce shipment costs by 12.9% and prices by 8.8%. Markups increase by 7.2%, driven primarily by non-merging firms reallocating resources away from regions where merged firms achieve large cost reductions.
We study the impact of horizontal mergers on the incentives of merging firms to invest in incremental innovation. We provide a decomposition of this impact that clarifies the various forces at work and the differences between demand-enhancing and cost-reducing innovation. Moreover, we derive sufficient conditions for a merger to either reduce or raise the merging firms' incentives to innovate, and show that the comparison of the price diversion ratio and the innovation diversion ratio can help screen mergers. We also uncover a useful connection between the level of production synergies induced by a merger and its impact on innovation.
This article studies the optimal refund mechanism when an uninformed buyer learns about their valuation over time. We consider various refund mechanisms including simple return policies (no returns or free returns), and stochastic return policies, which allow the buyer to keep the product with some probability upon receiving a refund. We show that the optimal refund mechanism is deterministic and takes a simple form: either the seller deters buyer learning by offering a low price without returns, or encourages maximal learning by setting a high price with free returns. Interestingly, free returns are optimal only for intermediate prior beliefs.
This article examines the welfare implications of third-party informational intermediation. A seller sets the price of a product that is sold through an intermediary, who discloses information about the product to consumers. In a model where the intermediary is consumer-minded-has a payoff that depends on both the seller's revenue and the consumer surplus, we show that total welfare may decrease in the Pareto sense, as the intermediary's consumer-mindedness increases. Furthermore, we show that consumer-mindedness emerges endogenously when a revenue-maximizing intermediary is forward-looking and the consumer base is increasing in past consumer surplus.
Using micro-data on over 160 million bids to buy and sell from three major electricity markets, we study efficiency improvements resulting from technologies such as storage. Consumer benefits arise not from stabilized prices but from changes in general price levels. To unpack the findings, we develop a set of price-theory results, demonstrating that the convexity of market excess demand, derived from the bids, serves as a novel measure that strongly predicts consumer benefits across all markets. This analysis highlights that even small allocative improvements can lead to significant redistributions of surplus, ultimately benefitting consumers.
