Price Setting and Rapid Technology Adoption: the case of the PC industry
Forthcoming in The Review of Economics and Statistics | With Copeland
We examine how the confluence of competition and upstream innovation influences downstream firms’ profit-maximizing strategies. We focus on personal computers (PCs) and using two novel data sets describe the dramatic fall in both price (27 percent at an annual rate) and sales of a computer over its product cycle. Further, we document that computers are typically sold for only 4 months before being replaced by a higher-quality product. To explain these facts, we develop and calibrate a vintage-capital model that combines a competitive market structure with an exogenous rapid rate of innovation.
Decomposing Medical-Care Expenditure Growth
Forthcoming in Measuring and Modeling Health Care Costs, NBER Volume, ed. by Aizcorbe, Baker, Berndt, Cutler. University of Chicago | With Dunn and Liebman
Medical-care expenditures have been rising rapidly, accounting for almost one-fifth of GDP in 2009. In this study, we assess the sources of the rising medical-care expenditures in the commercial sector. We employ a novel framework for decomposing expenditure growth into four components at the disease level: service price growth, service utilization growth, treated disease prevalence growth, and demographic shift. The decomposition shows that growth in prices and treated prevalence are the primary drivers of medical-care expenditure growth over the 2003 to 2007 period. There was no growth in service utilization at the aggregate level over this period. Price and utilization growth were especially large for the treatment of malignant neoplasms. For many conditions, treated prevalence has shifted towards preventive treatment and away from treatment for late-stage illnesses.
Health Economics 24(5), May 2015, 539-557 | With Dunn and Liebman
The medical-care sector often experiences changes in medical protocols and technologies that cause shifts in treatments. However, the commonly used medical- care price indexes reported by the BLS hold the mix of medical services fixed. In contrast, episode expenditure indexes, advocated by many health economists, track the full cost of disease treatment, even as treatments shift across service categories (e.g., inpatient to outpatient hospital). In our data, we find that these two conceptually different measures of price growth show similar aggregate rates of inflation. Although aggregate trends are similar, we observe differences when looking at specific disease categories that have implications for the productivity of disease treatment.
Journal of Health Economics 39, January 2015, 89-105 | With Dunn
This study examines the impact of major health insurance reform on payments made in the health care sector. We study the prices of services paid to physicians in the privately insured market during the Massachusetts health care reform. The reform increased the number of insured individuals as well as introduced an online marketplace where insurers compete. We estimate that, over the reform period, physician payments increased at least 11 percentage points relative to control areas. Payment increases began around the time legislation passed the House and Senate—the period in which their was a high probability of the bill eventually becoming law. This result is
consistent with fixed-duration payment contracts being negotiated in anticipation of future demand and competition.
In Measuring Economic Sustainability and Progress, NBER Volume, ed. by Jorgenson, Landefeld, and Schreyer | University of Chicago, 2014 | With Dunn and Liebman
Journal of Law and Economics 57 (1.), February 2014, 159-193 | With Dunn
We study the degree to which greater physician concentration leads to higher service prices charged by physicians in the commercially insured medical-care market. Using a database of physicians throughout the United States, we construct physician-firm concentration measures base “fixed-travel-time HHI” (FTHHI). We link these concentration measures to health insurance claims. We find that physicians in more concentrated markets charge higher service prices—a physician in the 90th percentile of market concentration will charge 14 to 30 percent higher fees than a physician in the 10th percentile. Our estimates imply that physician consolidation has caused about an 8 percent increase in fees on average over the last 20 years, and substantially higher increases in concentrated markets.
Journal of Health Economics, 2013 | With Dunn and Liebman
This study introduces a new framework for measuring and analyzing medical-care expenditures applied to the study of commercial medical-care markets. The framework focuses on expenditures at the disease level that are decomposed between price and utilization. These measures show that a particular MSA may have high overall prices, but may actually have low medical-care spending per episode due to low utilization. Prices within an MSA appear to be quite homogeneous, implying that regional factors explain a large degree of price variation. However, within an MSA there is a large degree of heterogeneity in utilization patterns between disease categories. This implies that most MSAs do not have systematically high or low utilization for all disease categories. We find evidence of a negative correlation between price and utilization across MSAs for many diseases, so it appears that the greater expenditures from higher prices are partly offset by lower utilization.
Health Services Research , October 2012 | With Dunn, Pack, and Liebman
The Journal of Industrial Economics 60(3), September 2012 | With Cornia and Gerardi
This study provides empirical evidence documenting how price dispersion moves with the business cycle in the airline industry. Performing a fixed-effects panel analysis on 17 years of data covering two business cycles, we find that price dispersion is highly pro-cyclical. This effect is especially pronounced for legacy carriers relative to low-cost carriers. We show that our empirical result is consistent with firms implementing second-degree price-discrimination tactics.
International Journal of Industrial Organization, August 2012 | With Goetz
Strategic alliances are arrangements in which firms combine efforts and resources to jointly pursue a business objective while remaining separate entities. An example of such a practice is airline codesharing, in which allied carriers engage in the cooperative marketing of certain flights. We empirically test for the presence of competitive motives behind such alliances by identifying an incumbent airline’s use of codesharing in response to the threat of future entry by a competitor. Using within-flight segment, fixed-effects regressions on panel data from 1998-2010, we estimate the impact of exogenous threats of entry on an airline’s decision whether to codeshare with a partner on a specific segment. Estimates show that when an incumbent carrier’s segment is threatened by a low-cost competitor it is approximately 25% more likely than average to be codeshared with its partner. Further tests show that this effect depends strongly upon the level of market share that the airline has on the segment in question. We interpret this as evidence of a strategic alliance being used to preemptively act in anticipation of future competition.
Journal of Political Economy 117(1), February 2009, 1-37, 02 | With Gerardi
We analyze the effects of competition on price dispersion in the airline industry, using panel data from 1993:Q1 through 2006:Q3. Competition has a negative effect on price dispersion, in line with the text-book treatmetn of price discrimination. This effect is pronounced for routes wtih consumers characterized by relatively heterogeneous elasticities of demand. On routes wtih a homogeneous customer base, the effects of competition on price dispersion are smaller. Our results contrast with those of Borenstein and Rose, who found that price dispersion increases with competition. We reconcile the different results by showing that the cross-sectional estimator suffers from omitted-variable bias.
Journal of Money Credit and Banking 40(4), 2008, 627-666
It has become customary to estimate the New Keynesian Phillips Curve (NKPC) with GMM using a large instrument set that includes lags of variables that are ad hoc to the model. Researchers have also conventionally used real unit labor cost (RULC) as the proxy for real marginal cost, even though it is difficult to support its significance. This paper introduces a new proxy for the real marginal cost term as well as a new instrument set, both of which are based on the micro foundations of the vertical chain of production. I find that the new proxy, based on input prices as opposed to wages, provides a more robust and significant fit to the model. Instruments that are based on the vertical chain of production appear to be both more valid and relevant towards the model. This paper was revised in July 2006.