Essays on Competition, Consumer Search Frictions, and Vertical Restraints

Abstract

In Chapter 2, I study firm price-setting decisions when the distribution of consumer inertia changes following product exits. When a product exits, consumers previously affiliated with that product actively "shop." Competing firms thus face a trade-off in the short-run: attract these consumers via lower prices or higher product quality, or take advantage of reduced competition via higher prices or lower product quality. I leverage a 2008 shock in the market for private Medicare, or Medicare Advantage, that induced insurers to remove 20% of plans nationally to measure this trade-off. I find that plans decrease premiums in the short-run, and increase premiums in the long-run in response to the cancellation event. These findings are consistent with an invest-then-harvest mechanism (Farrell and Klemperer, 2007). I also develop a model of dynamic firm competition to identify the welfare effects of consumer inertia under changes in market structure. In counterfactual exercises, I find that plan bids are 1.35% lower on average when firms assume all consumers actively shop and 0.02% higher on average when firms fail to internalize the marginal increase in actively shopping consumers following the plan exit event. In Chapter 3, Danial Asmat, Chenyu Yang, and I study minimum advertised price restrictions (MAPs), which are popular vertical restraints. We study retail pricing under MAP using price data of Seagate hard disk drives on U.S. online retailers. The data suggest that MAP is not a form of resale price maintenance. First, we find that retail prices can be significantly lower than MAP. Second, retail prices of products subject to MAP have greater dispersions between retailers. Lastly, retail prices sometimes increase after a MAP decrease. These observations are consistent with the predictions of a search model that interprets MAP as a form of information restraint. In Chapter 4, I study the price and non-price effects of a merger between two health insurers. Under U.S. antitrust policy, enforcers must identify mergers that are potentially harmful and propose remedies where necessary. I estimate the price, plan star rating, variety, share, and cost effects of Humana's acquisition of Arcadian Management Services (AMS), a Medicare Advantage HMO, and the Department of Justice's subsequent divestiture order to provide insight on antitrust enforcers' success. I find that Humana experienced cost synergies following the merger and passed them through to customers via lower premiums and higher star ratings. AMS plans were canceled almost immediately after they were acquired, reducing product variety. These plans were of a lower quality and beneficiaries in these plans were highly inertial, so AMS variety reductions are unlikely to have caused consumer welfare harms.