THE IMPACT OF A PUBLIC OPTION IN THE U.S. HEALTH INSURANCE MARKET

We develop a game‐theoretical framework to examine the implications of the introduction of a nonprofit “public option” in the U.S. health insurance market. In this model, heterogeneous consumers have to choose between two competing insurance plans. One plan is offered by a profit‐maximizing private insurer; the other by social‐welfare‐maximizing public option. In equilibrium, the distinct objectives of the two insurers induce adverse selection in consumer choice: the public option covers the less healthy consumers, yielding the more profitable segment of market to the private insurer. However, our empirical results suggest that both insurers will capture significant parts of the health insurance market. (JEL I11, L10, L21, L32)     

THE WELFARE EFFECTS OF THIRD‐DEGREE PRICE DISCRIMINATION IN A DIFFERENTIATED OLIGOPOLY

This article examines the welfare effects of third‐degree price discrimination under oligopolistic competition with horizontal product differentiation. We derive a necessary and sufficient condition for price discrimination to improve social welfare: the degree of substitution must be sufficiently greater in the “strong” market (where the discriminatory price is higher than the uniform price) than in the “weak” market (where it is lower). It is verified, however, that consumer surplus is never improved; social welfare improves solely owing to an increase in the firms' profits in the case of linear demands. (JEL D43, L11, L13)     

PRODUCT COMPATIBILITY HINDERS PRE-EMPTIVE ADVERTISING

This paper considers competition in systems of complementary products and examines how compatibility affects the use of informative advertising by an incumbent to deter entry. Advertising increases demand for a product; customers become price sensitive and competition increases, pre-empting new market entrants. However, compatibility reduces competition, so incumbent advertising becomes less effective at deterring entry and additional, costly advertising would be required to induce deterrence. Moreover, compatibility increases advertising by a potential entrant; with efficient advertising technology, consumers are informed about all products and the incumbent cannot deter entry by using additional advertising. Therefore, product standardization policies that encourage compatibility can support new market entrants by discouraging pre-emptive advertising strategies. (JEL D21, D43, L13, L15)     

CREDIBLE SIGNALS OF THE RELEASE OF NEW VERSIONS

Prices can credibly signal whether a durable‐goods monopolist will offer an improved good in the future. When the future release of a new version is private information, a monopoly seller will reveal a failure to develop and market a new version with a lower price than he or she would charge in full information. A firm would be willing to pay more to innovate when consumers are uncertain than if they are informed ex ante because a failure to innovate is punished by a low equilibrium price. Consumers' uncertainty about innovation intensifies an unsuccessful innovator's Coasian problem and increases consumer welfare. (JEL D82, L12, L15)     

TRANSPARENCY IN MARKETS FOR EXPERIENCE GOODS: EXPERIMENTAL EVIDENCE

We propose an experimental design to investigate the role of information disclosure in the market for an experience good. The market is served by a duopoly of firms that choose both the quality and the price of their product. Consumers differ in their taste for quality and choose from which firm to buy. We compare four different treatments in which we vary the degree to which consumers are informed about quality. Contrary to theoretical predictions, firms do not differentiate quality under full information. Rather, both tend to offer products of similar, high quality, entailing more intense price competition than predicted by theory. Under no information, we observe a “lemons” outcome where quality is low. At the same time, firms manage to maintain prices substantially above marginal cost. In two intermediate treatments, quality is significantly higher than the no‐information level, and there is evidence that prices become better predictors of quality. Taken together these findings suggest that information disclosure is a more effective tool to raise welfare and consumer surplus than theory would lead one to expect. (JEL L15, C91, D82)     

DISCOUNT PRICING

We investigate the practice of framing a price as a discount from an earlier price, with information such as “was $200, now $100.” We discuss two reasons why a discounted price—rather than a merely low price—can make a consumer more willing to purchase. First, a high initial price can indicate the seller has chosen to supply a high-quality product. Second, when a seller with limited stock runs a clearance sale, later consumers infer that unsold stock has higher expected quality when its initial price was higher. We also suggest a behavioral explanation, which is that consumers with reference-dependence preferences are more likely to buy if they perceive the price as a bargain relative to the earlier price. Discount pricing is therefore an effective marketing technique, and a seller may wish to deceive potential customers by offering a false discount. The welfare effects of regulation to prevent fictitious pricing are subtle, with potential unintended consequences, and depend on whether consumers are sophisticated or naive. (JEL D18, D42, D83, L15, M31)     

DEMAND FOR DIFFERENTIATED DURABLE PRODUCTS: THE CASE OF THE U.S. COMPUTER PRINTER MARKET

This paper develops an estimation technique for analyzing the impact of technological change on the dynamics of consumer demand in a differentiated durable products industry. The paper presents a dynamic model of consumer demand for differentiated durable products that explicitly accounts for consumers' expectations of future product quality and consumers' outflow from the market that arises endogenously from their purchase decisions. The timing of consumers' purchases is formalized as an optimal stopping problem. A solution to that problem defines the hazard rate of product adoptions, while the nested discrete choice model determines the alternative‐specific purchase probabilities. Integrating individual decisions over the population distribution generates rich dynamics of aggregate and product‐level sales. The empirical part of the paper applies the model to data on the U.S. computer printer market for 1998–1999. The estimates support the hypothesis of consumers' forward‐looking behavior, allowing for better demand forecasts and improved measures of welfare gains from introducing new products. (JEL L11, C35, D91)     

THE EFFECT OF DIRECT TO CONSUMER TELEVISION ADVERTISING ON THE TIMING OF TREATMENT

We examine how direct to consumer advertising affects the delay between diagnosis and pharmacological treatment for patients suffering from a common chronic disease. The primary data for this study consist of patients diagnosed with osteoarthritis (N = 18,235) taken from a geographically diverse national research network of 72 primary care practices with 348 physicians in 27 states over the 1999–2002 time period. Brand‐specific advertising data were collected for local and network television at the monthly level for the nearest media markets to the practices. Results of duration models of delay to treatment suggest advertising does affect the length of time that patients and physicians wait to initiate therapy. This evidence suggests that these effects may be welfare enhancing in that advertising tends to encourage more rapid adoption among patients who are good clinical candidates for the therapy and leads to less rapid adoption among some patients who are poor clinical candidates. (JEL D12, I11)     

A SEMIPARAMETRIC DISCRETE CHOICE MODEL: AN APPLICATION TO HOSPITAL MERGERS

We propose a computationally simple semiparametric discrete choice estimator to model rich consumer heterogeneity. We assume groups of observably similar consumers have similar preferences, but allow preferences to vary freely across these groups. Model flexibility is easily adjusted by setting a single tuning parameter; we suggest a cross‐validation method to do so. We analyze the model's properties in the context of hospital mergers, both analytically and via a Monte Carlo analysis. The model performs well for policy relevant substitution and welfare measures, even if misspecified, when the tuning parameter is set within the neighborhood of the value chosen by cross validation. (JEL C14, D12, I11, L41)     

ENVIRONMENTALISM,STIMULUS, AND INEQUALITY REDUCTION THROUGH INDUSTRIAL POLICY: DID CASH FOR CLUNKERS ACHIEVE THE TRIFECTA?

The 2009 American Cash for Clunkers program, which subsidized consumers who scrapped old vehicles and purchased new vehicles, was promoted by appealing to multiple constituencies. We evaluate the policy and alternatives according to its stated goals: emissions reductions, economic stimulus, and reducing inequality. We calibrate a dynamic partial equilibrium portfolio model to match consumer expenditure data from 1998 to 2011 focusing on heterogeneity across cars and trucks. We find the program generated $0.17 in environmental benefits, $0.28 in consumer surplus, and $0.31 in net discounted additional spending per subsidy dollar. Since subsidies largely went to middle-income infra-marginal consumers, the program exacerbated consumption inequality. We evaluate alternative policy designs and find no policy which simultaneously improves all outcomes. (JEL H23, L52, L92, D63)     

Consumers’ Insights About Spirituality in Advertising

While the study of spirituality in advertising is an emerging area of scholarship, previous research tends to focus more on the spiritual message rather than on the consumer. Although some studies report on the meanings consumers derive from spiritual advertising messages, the definitions of spirituality as religion in these studies are not in alignment with the holistic approach applied here. In this article, we interview consumers and ask what meanings may emerge from their responses to spiritually dense commercials. (By spiritually dense we mean commercial messages rich with spiritual core ideas, as described in the Spirituality in Advertising Framework). Four themes have emerged from the data: authenticity, the journey, inspiration, and nature. We analyze these findings in light of both theory and practice. Consideration of ethical issues and the positive dimension of spirituality in advertising are also discussed.     

HOW DOES ADVERTISING AFFECT MARKET PERFORMANCE? A NOTE ON GENERIC ADVERTISING

We propose a novel approach to estimating the effect of advertising on market performance that relies on the preferences of firms participating in generic advertising programs. Generic advertising campaigns provide a unique window to observe advertising effects on market performance, because rotations in market demand systematically redistribute advertising rents among firms according to observable characteristics on producer size. We examine producer attitudes towards generic advertising in the “Beef. It's What's for Dinner!” campaign of the U.S. Beef Checkoff program, the subject of the recent and controversial Supreme Court ruling on generic advertising as a form of government speech. We find the likelihood producers favor an expansion of the advertising program increases in their operating scale. This finding is consistent with an advertising campaign that has led to a counterclockwise rotation of market demand and a commensurate increase in market performance in the U.S. beef market. (JEL L1, M37, Q13)     

FREE PRODUCT TRIALS: DISCLOSING QUALITY AND MATCH VALUE

A prepurchase trial allows a consumer to learn both a product's quality and how well it matches her idiosyncratic taste. By offering a trial, the marginal seller thus shifts up demand by increasing perceived quality and rotates demand by revealing match. In contrast to classic results,a trial is offered only when quality is sufficiently high, and sometimes not at all. Fewer trials are offered when match is more important and when there are fewer gains from trade. “Cooling off” rules allowing free returns are effectively mandatory trials, benefiting consumers but decreasing welfare when there are sufficient gains from trade. (JEL D18, L15, L5)     

ON FRUITFUL AND FUTILE TESTS OF THE RELATIONSHIP BETWEEN SEARCH AND PRICE DISPERSION

We exploit cross‐sectional and temporal differences in search intensity in order to examine the relationship between search costs and price dispersion using a hand‐collected panel data set from Jerusalem's Shuk Mahane Yehuda outdoor market. We present empirical evidence that price dispersion increases with the cost of search using several different measures of price dispersion; however, our interpretation of this finding is sensitive to the search proxy in question. We also address several acute difficulties facing empiricists seeking to test theoretical price‐dispersion models in which consumers are heterogeneous in their search behavior. (JEL L11, L13)     

DOES RELATIVE THINKING EXIST IN REAL‐WORLD SITUATIONS? A FIELD EXPERIMENT WITH BAGELS AND CREAM CHEESE

Many experiments show that consumers consider relative price differences even when only absolute price differences are relevant from an economic perspective, a phenomenon that was denoted “relative thinking.” These experiments, however, were conducted using hypothetical questions. To test whether the relative thinking bias also exists in real‐world situations, a field experiment where subjects could purchase either a bagel or a bagel with cream cheese was conducted. The monetary addition for the cream cheese was kept constant ($0.20) in both treatments, but the bagel's price varied ($0.05 in one treatment and $0.30 in the other). Relative thinking then implies that more people should add the cream cheese when the bagel's price is higher, because the relative price increase for the cream cheese is then smaller. However, the results did not document any relative thinking—more people (in percentage of those who purchase) added the cream cheese when the bagel's price was lower (the difference between the treatments, however, was not statistically significant). A replication of the experiment as a hypothetical‐scenario experiment did document relative thinking, suggesting that introduction of financial incentives might alleviate relative thinking. (JEL C93, D01, D10, L00, M31)     

MEASURING THE WELFARE GAIN FROM PERSONAL COMPUTERS

The welfare gain to consumers from the introduction of personal computers (PCs) is estimated. A simple model of consumer demand is formulated that uses a slightly modified version of standard preferences. The modification permits marginal utility, and hence total utility, to be finite when the consumption of computers is zero. This implies that the good will not be consumed at a high enough price. It also bounds the consumer surplus derived from the product. The model is calibrated/estimated using standard national income and product account data. The welfare gain from the introduction of PCs is 2%–3% of consumption expenditure. (JEL E01, E21, O33, O47)     

REGULATED AND UNREGULATED SUBSTITUTES: AVERSION EFFECTS OF AN ETHANOL MANDATE

One approach for handling more aggressive goals under an ethanol mandate is to use a “dual blend” mandate in which both the preferred new ethanol blend and the old (possibly ethanol‐free) blend of gasoline coexist. Highlighting the case of New South Wales, Australia, we show the dual nature of such a mandate can potentially lead to significant costs when consumers are averse. We show consumers en masse rejected the new blend and paid 43 cents per gallon more to avoid it. Not even the second of the mandate's four targets could be reached, and the consumer cost was substantial. (JEL L51, Q41, Q42, Q51)     

STRATEGIC EXCLUSION OF THE HIGHEST‐VALUED BIDDERS IN WHOLESALE AUTOMOBILE AUCTIONS

By restricting bidders to be qualified dealers, wholesale automobile auctions exclude the bidders who place the highest value on the vehicles: consumers. This article provides an explanation for this puzzling entry restriction by modeling the inventory‐management decisions of a firm. If an automobile dealer has more vehicles in inventory than is optimal, it cannot reduce its inventory by selling directly to consumers without impacting the demand for the automobiles that remain. However, if the dealer sells his/her excess inventory to a competitor, the demand for his/her remaining vehicles increases as the competitor responds by acquiring fewer additional vehicles. We demonstrate that for any market demand function and any cost of the competitor acquiring additional vehicles, a dealer with excess inventory does better by selling a subset of its vehicles to a competitor rather than directly to consumers. We discuss the market for wholesale automobiles in relation to other markets where goods are also auctioned but where entry is not restricted to qualified dealers. Doing so allows us to compare our inventory‐management explanation to common explanations provided by industry practitioners. We find that intuitive alternative stories do not consistently explain practices across markets. (JEL D44, L11, L62)     

AIRLINE PRICING BEHAVIOR UNDER LIMITED INTER‐MODAL COMPETITION

This paper empirically analyzes airline pricing for short‐haul flights in contexts with no credible threat of inter‐modal competition. To this end, we explore the southern Italian market since it is less accessible by other transport modes and thus fares are the direct outcome of air‐related competition. We show, in fact, that market power matters, depending on the level of intra‐modal competition, and that airlines apply differentiated mark‐ups. Besides, consistent with the implementation of inter‐temporal price discrimination (IPD), we find a non‐monotonic inter‐temporal profile of fares with a turning point included in the interval of the 43rd to 45th days before departure. Finally, we provide evidence that in more competitive markets, airlines are more likely to engage in IPD. (JEL L11, L13, L93)     

CONSUMPTION BENEFITS OF NATIONAL HOCKEY LEAGUE GAME TRIPS ESTIMATED FROM REVEALED AND STATED PREFERENCE DEMAND DATA

This paper examines the demand for hockey game trips among metropolitan and nonmetropolitan residents of Alberta, Canada. Using data on both revealed and stated preference game‐trip behavior from a telephone survey conducted throughout Alberta, we estimate the effect of ticket prices, team quality, arena amenities, and capacity on the latent demand for National Hockey League hockey games. We find that lower ticket prices, higher team quality, and additional capacity encourage attendance. In the status quo scenario, consumer surplus per game is $50 for those who had attended hockey games and about 50% less for those who had not attended games. Exploiting the stated preference data, we develop a number of other consumer surplus estimates. We also include travel costs in the estimation of the demand function and estimate the full value of the game trip considering both ticket prices and travel costs. Sold‐out arenas in Calgary and Edmonton generate annual consumption benefits of $40 and $35 million when only ticket prices are used to calculate consumer surplus (i.e., excluding travel costs). Considering the full‐price consumer surplus for the Calgary Flames of $103 per game trip, the annual consumption benefits may be as high as $82 million. (JEL R22, L83, D61)