How do Brands’ “Own Generics” Affect Pharmaceutical Prices?

This paper examines the price effects of generic drugs that are produced by brand-name drug firms and that are labeled, priced, and marketed to compete against independent generics. The strategy of introducing such “pseudo-generics” – also known as “authorized generics” – has raised some antitrust concerns. One defense of this strategy has been that the additional competition created by pseudo-generics should lead to lower prices. This paper develops a simple model to show that pseudo-generics can be expected to have exactly the opposite effect. It then examines empirical evidence on this point from the Canadian pharmaceutical market, showing that there appears to be a positive relationship between drug prices and the share of generic sales made by the brand’s own pseudo-generic.     

Rent appropriation of knowledge‐based assets and firm performance when institutions are weak: A study of Chinese publicly listed firms

Research summary : A firm's strategic investments in knowledge‐based assets through research and development (R&D) can generate economic rents for the firm, and thus are expected to affect positively a firm's financial performance. However, weak protection of minority shareholders, weak property rights, and ineffective law enforcement can allow those rents to be appropriated disproportionately by a firm's powerful insiders such as large owners and top managers. Recent data on Chinese publicly listed firms during 2007–2012 were used to demonstrate that the expected positive relationship between knowledge assets and performance is weaker in transition economies when a firm's ownership is highly concentrated and its managers have wide discretion. Moreover, rent appropriation by insiders was shown to vary with the levels of institutional development in which a firm operates. Managerial summary : Investing in knowledge‐based intangible assets (e.g., R&D) is an important value‐creation activity for the firm. Such value creation process can be facilitated by large shareholders and powerful managers, who can then take an advantageous position with critical insider information on these valuable intangible assets and therefore enjoy more opportunities to appropriate more value from them, leaving less value for other minority shareholders. The value distribution becomes increasingly skewed against minority shareholders when the institutional protection for them is weak. Indeed, in a large sample of Chinese publicly listed firms, we found that R&D investment becomes less positively associated with firm financial performance with the presence of large shareholders, high managerial equity, or CEO/Chairman duality, especially in Chinese provinces with weak institutional development. Copyright © 2016 John Wiley & Sons, Ltd.     

Prominence,complexity, and pricing

This paper analyzes prominence in a homogeneous product market where two firms simultaneously choose both prices and price complexity levels. Market-wide complexity results in consumer confusion. Confused consumers are more likely to buy from the prominent firm. In equilibrium, there is dispersion in both prices and price complexity. The nature of equilibrium depends on prominence. Compared to its rival, the prominent firm makes higher profit, associates a smaller price range with lowest complexity, puts lower probability on lowest complexity, and sets a higher average price. However, higher prominence may benefit consumers and, conditional on choosing lowest complexity, the prominent firm’s average price is lower, which is consistent with confused consumers’ bias.     

A Search Model Where Consumers Choose Quantity Based on Expected Price

I describe a price game in which consumers face search costs and base their quantity decision on the expected price. Because of search costs, the choice of the firm they will buy from is described by a random process. I show that the expected equilibrium price is above the monopoly price. This result does not change if demand comes from a small share of perfectly informed consumers with zero search costs.     

Payment Evasion

This paper shows that a firm can use the purchase price and the fine imposed on detected payment evaders to discriminate between unobservable consumer types. Assuming that consumers self‐select into regular buyers and payment evaders, we show that the firm typically engages in second‐degree price discrimination in which the purchase price exceeds the expected fine. In addition, we find that higher fines do not necessarily reduce payment evasion. We illustrate with data from fare dodging on public transportation.     

Waterfall Versus Sprinkler Product Launch Strategy: Influencing the Herd

A seller decides the price and sequence in which a product of unknown value is introduced to consumers. Consumers inspect the product before consumption and observe past prices and sales. Consumption at a high price is informative for later consumers as it indicates that the product is likely to be of high value. I show that on an average prices decrease over time. However, expected revenue on an average rises over time. For a high enough discount factor, I find that for extreme beliefs the firm introduces the product to all consumers but for intermediate values the product is introduced only to one consumer.     

MANAGERIAL INCENTIVES AND THE PRICE EFFECTS OF MERGERS*

Most analysis of market power assumes that managers are perfect agents for shareholders. This paper relaxes that assumption. When managers of a multi‐product firm exert unobservable effort to improve product quality, there is a trade‐off between providing adequate effort incentives and ensuring sufficient price‐coordination between the product divisions. This makes some intra‐firm price competition optimal, explaining why many multi‐product firms allow for competition between divisions. When there are effort spillovers, the optimal amount of price competition can be as great as when the products are under separate ownership. Even with some profit‐sharing, intra‐firm price competition can reduce quality‐adjusted price, which has important implications for antitrust policy.     

Economics at the FTC: Hospital Mergers,Authorized Generic Drugs,and Consumer Credit Markets

Economists at the Federal Trade Commission pursue the agency’s competition and consumer protection missions. In this year’s essay, in antitrust, we discuss various aspects of our hospital merger analyses as well as the effects of authorized generic drugs on consumers and competition. In consumer protection, we describe two ongoing studies on the use of credit-based insurance scores to price homeowners insurance, and the accuracy of consumers’ credit reports that are provided by credit bureaus.     

On two-part tariff competition in a homogeneous product duopoly

We explore aspects of two-part tariff competition between duopolists providing a homogeneous service when consumers differ with respect to their usage levels. Competition in only one price component (the fee or the rate) may allow both firms to enjoy positive profits if the other price component has been set at levels different enough between firms. Fixing one price component alters the nature of competition, indirectly introducing an element of product differentiation. Endogenous market segmentation emerges, with the heavier users choosing the lower rate firm and the lighter users choosing the lower fee firm. When no price component can be negative, competition becomes softer, profits tend to be higher but there is also a disadvantage for the firm that starts with a higher fee than that of its rival.     

Predatory intent under uncertainty

Current analyses of predatory behavior neglect uncertainty. Its presence complicates a firm's evaluation of profits and risks associated with various pricing strategies. Using a price leadership model (with the supply of the competitive fringe not known in advance), we show that a risk averse dominant firm will price lower than the price which maximizes expected profits. Such behavior could be misconstrued as being predatory if marginal and average variable cost rules are used for establishing the proof of predation.     

家族企业所有者间控制权配置选择与演进

本文在现有研究基础上，引入家族性利他主义规则制度变量，探讨了投资者权益司法保护与家族性利他主义规则两类制度变量对家族企业所有者间控制权配置选择的影响。本文研究表明，两类制度变量约束下的投资者权益保护状况越好。则所有者间控制权或。股权配置可能的分散程度就越大。司法保护制度变量的状态决定了控制权或股权的分散配置是否能够突破家族的界限。并且上述结论对中国家族企业的未来演进具有现实的含义。     

Emotions and new venture judgment in China

A new venture is likely to be perceived as either an opportunity or a risk. People also vary in their subjective judgment of the probability of a new venture’s success. From an affective approach, this study investigates how people’s feelings about the outcomes of a venture affect their subjective judgment on the value and probability of founding a new business. It was found that an entrepreneur’s hope of creating a successful new venture significantly increases the attractiveness and perceived success likelihood of the new venture. Those who show less fear of failure and lower surprise for the success tend to view a new venture as an opportunity. Those who show less anger, regret, and higher contempt of failure and lower surprise of success as well as lower trait sadness judge a higher subjective probability for the success of founding a new firm. These findings reveal entrepreneurs’ initiatives in economic activities. Positive and negative implications are discussed, particularly for entrepreneurial activities in China.     

Experimenting to Learn about Demand in Duopoly with Forward‐Looking Consumers

Using a two‐period model, I show that competition between two symmetric duopolists trying to learn about unknown features of demand results in an informationally suboptimal process. Because a firm’s marginal return to price experimentation equals zero if the rival’s price is matched in the first period, myopic symmetric pricing arises in equilibrium even though a firm’s expected second‐period profit attains a local minimum. Furthermore, forward‐looking consumers suffer from ratcheting because their first‐period purchase decisions partly reveal their preferences, which exacerbates the informational suboptimality of the firms’ experimentation process without affecting their pricing. The role of firm asymmetries is also analyzed.     

Does Energy Consumption Respond to Price Shocks? Evidence from a Regression‐Discontinuity Design

We exploit unique features of a recently introduced tariff schedule for natural gas in Buenos Aires to estimate the short‐run impact of price shocks on residential energy utilization. The schedule induces a non‐linear and non‐monotonic relationship between households' accumulated consumption and unit prices, thus generating exogenous price variation, which we exploit in a regression‐discontinuity design. We find that a price increase causes a prompt and significant decline in gas consumption. The results also indicate that consumers respond more to recent past bills than to expected prices, which argues against an assumption of perfect awareness of complex price schedules by consumers.     

Sequential price and quantity decisions under supply and demand risks

Firms need to deal with not only risks from stochastic demand but also risks from supply side. The supply side risk may be due to parts/service outsourcing, third party logistics, or random yield in production processes. In this paper, we study how firms sequentially make price and quantity decisions under these two risks. The first question we try to answer is how these two risks affect the decisions and profits of the firm. We find that increased supply risk usually causes increased quantity/stocking decision, however, there exists a threshold level of supply risk above which the firm reduces quantity/stocking amount as supply risk increases. This observation may be used in a supply chain setting, where reduction of the supply risk can cause higher delivered quantity and improve supply chain performance. This observation also provides support and insights on prioritizing the risk reduction efforts from marketing and operations to achieve better coordination. At the same time, reduction of the risks help not only firms but also consumers as the optimal price decreases. To further improve decision making process under both uncertainties, we study the impact from information revelation and postponement of decisions. We compare results from different sequential decision making cases. As illustrated in the paper, firms gain competing advantage when decision postponement is available and this advantage becomes further significant as the risks increase. Our numerical examples also indicate that price postponement strategy is usually preferred but the relative profit difference between price postponement and quantity postponement become smaller as consumers become more sensitive to the price.     

The Collusive Equilibrium in a Quantity-Setting Supergame: An Application to Taiwan’s Flour Industry

This paper examines the stability of the collusive equilibrium in Friedman’s repeated game through an empirical study of Taiwan’s flour market. We calculate the payoff streams following a deviation or adherence for each firm. The evidence shows that the specified punishment path is credible, and could sustain the collusive allocation.     

Coordination in a retailer-led supply chain through option contract

This paper develops a model to study channel coordination and risk sharing in a retailer-led supply chain. Such chains are characterized by a dominant retailer who aims to coordinate the upstream production quantity. We investigate a coordinating contract based on an option with two parameters. An option price is paid by the retailer for each additional unit of product reserved beyond the initial order. An exercise price serves as the unit purchasing price when the retailer sets a second order if realized demand is more than the initial order. A successful coordination needs two conditions. One condition is to maintain a negative correlation between exercise price and option price. Particularly, we draw the functional form. The other is that the firm commitment must be lower than the optimal production quantity in a centralized system. In a risk sharing mechanism, we prove that such a contract brings benefit to each party.     

Investment under Demand Uncertainty,Ex-Ante Pricing,and Oligopoly

This paper considers the capacity choice of duopolists who set price ex-ante under demand uncertainty with risk-neutrality. The duopolists compete for market shares on the basis of availability of supply, rather than by price competition. Collusive pricing coexists with Cournot–Nash capacity choice. A formal model is presented, where the market share of each firm may deviate from the certainty share due to rationing. With shares reflecting different costs, capacity utilisation for the lower cost firm is expected to be substantially lower. The implications for the price-cost margin and capacity formation are also explored.     

Stakeholder value appropriation: The case of labor in the worldwide mining industry

Research Summary : We evaluate how the value appropriated by employees varies in response to an exogenous shock to the price of the firm's product and how this variation depends on institutional and ownership structures. Institutional and ownership structures that favor employees can influence firms’ location decisions and shareholders’ incentives to invest. Using data from the main copper mines in the world, we show that the value appropriated by employees rises in response to an exogenous increase in the price of minerals. Our results indicate that the magnitude of the increment in the value captured by employees is larger in stated‐owned companies, when labor regulations promote productivity‐based payments, when wages are determined through a centralized bargaining process, and when regulations associated with hiring and firing are more flexible. Managerial Summary : We show how labor regulations and state ownership affect the value appropriated by employees when there are exogenous changes in the price of the firm's products. Since the value generated by a firm is distributed among different stakeholders, a higher appropriation of value by employees results in lower appropriation by another party. Therefore, by changing the distribution of value, managerial decisions about location and entry could be affected. For instance, shareholders of firms with positive future expectations about the prices of their products might prefer to enter markets in which salary negotiations are not centralized or where partnership with the local government is not mandatory. Overall, our analysis calls for the consideration of the external environment when evaluating value appropriation by different types of stakeholders.     

Are OECD-prescribed “good corporate governance practices” really good in an emerging economy?

This paper examines whether adopting OECD-prescribed corporate governance principles can solve the major corporate governance problem in an emerging economy—controlling-shareholder expropriation. We argue that “good governance practices” in OECD countries (e.g., an active board of directors, separation of chairperson and the CEO, significant presence of outside directors, and a two-tier board) cannot mitigate the negative effect of controlling-shareholder expropriation on corporate performance for two main reasons. First, most good governance practices are mainly designed to resolve conflicts between shareholders and the management but not conflicts between controlling and minority shareholders. Second, board directors are typically not independent to controlling shareholders, and supervisory directors often have low status and weak power in a firm. Using a panel of over 1,100 Chinese listed firms between 2001 and 2003, we find supportive evidence for our arguments. We discuss the implication of our study for public policy and strategies of investors.