Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

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Monday, January 9, 2012

Mergers and Innovation in the Pharmaceutical Market

Posted by D. Daniel Sokol

William S. Comanor, (UCLA and UC Santa Barbara) and F. M. Scherer (Harvard University) address Mergers and Innovation in the Pharmaceutical Market.

ABSTRACT: The U.S. pharmaceutical industry has experienced in recent years two dramatic changes: stagnation in the growth of new molecular entities approved for marketing, and a wave of mergers linking inter alia some of the largest companies. This paper explores possible links between these two phenomena and proposes alternative approach to merger policy. It points to the high degree of uncertainty encountered in the discovery and development of new pharmaceutical entities and shows how optimal strategies entail the pursue of parallel research and development paths. Uncertainties afflict both success rates and financial gains contingent upon success. A new model simulating optimal strategies given prevalent market uncertainties is presented. Parallelism can be sustained both within individual companies' R&D programs and across competing companies. The paper points to data showing little parallelism of programs within companies and argues that inter-company mergers jeopardize desirable parallelism across companies.

January 9, 2012 | Permalink | Comments (0) | TrackBack (0)

Experimentation in Two-Sided Markets

Posted by D. Daniel Sokol

Martin Peitz (Department of Economics, University of Mannheim), Sven Rady (Department of Economics, University of Bonn) and Piers Treppers (Department of Economics, University of Munich) describe Experimentation in Two-Sided Markets.

ABSTRACT: We study optimal experimentation by a monopolistic platform in a two-sided market framework. The platform provider faces uncertainty about the strength of the exter- nality each side is exerting on the other. It maximizes the expected present value of its prot stream in a continuous-time infinite-horizon framework by setting participation fees or quantities on both sides. We show that a price-setting platform provider sets a fee lower than the myopically optimal level on at least one side of the market, and on both sides if the two externalities are of approximately equal strength. If the externality that one side exerts is suciently weaker than the externality it experiences, the opti- mal fee on this side exceeds the myopically optimal level. We obtain analogous results for expected prices when the platform provider chooses quantities. While the optimal policy does not admit closed-form representations in general, we identify special cases in which the undiscounted limit of the model can be solved in closed form.

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Economic models of consumer protection policies

Posted by D. Daniel Sokol

Mark Amstrong (Oxford - Econ) summarizes Economic models of consumer protection policies.

ABSTRACT: This paper summarizes some of my recent work on consumer protection. I present three theoretical models which illustrate the merits and drawbacks of a number of common consumer protection policies, namely: policies which prevent firms from setting unduly high prices; policies which prevent firms requiring on-the-spot decision making by prospective customers, and policies which prevent suppliers from paying commission payments to sales intermediaries.

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Price Controls and Consumer Surplus

Posted by D. Daniel Sokol

Jeremy Bulow (Stanford University) and Paul Klemperer (Oxford University) explore Price Controls and Consumer Surplus.

ABSTRACT: Price controls lead to misallocation of goods and encourage rent-seeking. The misallocation effect alone is enough to ensure that consumer surplus is always reduced by a price control in an otherwise-competitive market with convex demand if supply is more elastic than demand; or when demand is log-convex (e.g., constant-elasticity) even if supply is inelastic. The same results apply both when rationed goods are allocated by costless lottery among interested consumers, and when costly rent-seeking and/or partial de-control mitigates the allocative inefficiency. The results are best understood using the fact that in any market, consumer surplus equals the area between the demand curve and the industry marginal revenue curve.

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