Working Paper: CEPR ID: DP15279
Authors: Jan Boone
Abstract: This paper shows that it is possible for intermediate goods to be priced above the value that the good has for final consumers. This happens in sectors selling to adverse selection markets where the cost difference between consumer types is dominated by their elasticity difference. High input prices then help to separate consumer types. An increase in competition can raise prices further. We use the example of pharmaceutical companies selling drugs to a health insurance market at prices exceeding value. Another feature of the model is an excessive private incentive to reduce market size, e.g. in the form of personalized medicine.
Keywords: adverse selection; pricing above value; vertical relations; pharmaceutical prices; risk equalization
JEL Codes: I13; I11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| market competition (L13) | pricing behavior (D40) |
| consumer types (D19) | pricing above perceived value (D46) |
| adverse selection (D82) | pricing above perceived value (D46) |
| risk adjustment policies (G52) | treatment prices (P22) |
| competition among insurers (G22) | treatment prices (P22) |
| high input prices (L11) | separation of consumer types (D16) |
| supra profits (D33) | competitiveness of high-type market (L13) |