Quality choice with reputation effects: Evidence from hospices in California (Job Market Paper)
Abstract: Hospices – firms that give palliative care to dying patients – form a large and growing industry in the US with significant implications for patient welfare and cost savings. Using data from California, I study how a hospice’s quality choice is influenced by reputation concerns, and explore counterfactual policies to improve hospice quality. There is no price competition because Medicare pays hospices a fixed per-day rate for each patient, so hospices compete on reputation. A hospice’s reputation is a stock of its past quality choices. Thus a hospice can build up its reputation stock over time by consistently choosing high quality. First I estimate a structural model of hospice choice by consumers, and find that hospice reputation has a strong effect on demand. Then I build a dynamic oligopoly model of hospices choosing quality to compete on reputation against rivals. This is used to recover the hospice cost function and conduct the following policy counterfactuals. As reputation becomes more persistent – for instance, through the creation of an online hospice rating system – hospices choose higher quality. Hospices also choose higher quality as Medicare prices increase, but the response depends on how differentiated they are in characteristics from rivals. Finally, a hybrid per-day per-visit hospice reimbursement scheme achieves the same quality with nearly 30% lower spending than the current per-day Medicare scheme.
Entry and pricing with fighting brands: Evidence from the pharmaceutical industry (with Rena Conti)
Abstract: In the pharmaceutical industry, branded drug manufacturers can compete with generics by releasing an Authorized Generic (AG), which is identical to the branded drug but without the brand label attached. This is used to price discriminate between consumers of different preferences, with the branded drug charging high price and AG charging low price to compete with generics. Such "fighting brand" strategies are common in various industries, and in this paper we study these in the context of the pharmaceutical industry. We analyze how AG and generics interact in a strategic setting using total drug sales and revenue data on US for 2004-2016. First, we estimate a random-coefficients discrete choice demand model and find significant heterogeneity in brand valuation and price sensitivity among consumers. Next, we build a structural model of generic entry, AG release, and pricing. Combined with calibrated cost parameters, this is used to conduct counterfactuals. First, we change key demand primitives to study responses by generics and AGs in these alternative environments. Second, we show that the decision to release an AG depends mostly on the difference in marginal and per-period operating cost between generics and the AG - the higher the AG's marginal cost and operating cost relative to generics, the less likely it is to enter. Third, we show that the AG's ability to enter immediately in contrast to generics that have to wait for FDA approval gives branded drug manufacturers an additional incentive to release an AG. Fourth, we show that a faster generic approval rate leads to greater generic entry, lower likelihood of AG being released, and lower prices. Finally, we study what happens to market outcomes if AGs are banned, as has been discussed in policy circles and argued for by generic firms. Conditional on AG and generics having the same marginal cost, we find that banning AG leads to higher market prices.