Changes In Consumer Surplus Research Articles

Patient Welfare Implications of Indication-Specific Value-Based Pricing of Multi-Indication Drugs

ObjectivesIndication-specific value-based pricing (ISVBP) is a mechanism that allows the prices of multi-indication drugs to vary across indications by aligning the drug prices with value. However, the overall impact of ISVBP on patients across indications is uncertain. This study examines the theoretical welfare effects of ISVBP for multi-indication drugs and compares consumer surplus under ISVBP and single pricing, the latter of which is based on the weighted average value. MethodsWe considered a healthcare system with government-negotiated drug prices based on the value of drugs. We assumed a drug with 2 indications and 1 relevant comparator for each indication. The value of the drug was uniformly distributed among the patients of each indication in the base case. We also considered alternative scenarios with exponentially and Pareto distributed drug values. Numerical simulations were conducted to explore potential settings where ISVBP was welfare-improving for patients compared with single pricing. ResultsThe theoretical analysis showed that the consumer surplus change was strictly non-positive from single pricing to ISVBP. Therefore, it was not welfare-improving for patients in the settings of interest. Numerical simulations confirmed this result across various scenarios of value distributions. ConclusionsThis study provides insights into the patient welfare implications of ISVBP for multi-indication drugs. We did not identify conditions under which ISVBP can enhance overall patient well-being, suggesting that it should be implemented cautiously. Future research should examine dynamic welfare implications related to innovation incentives because they may significantly affect population health in the future.

Information Sharing Game and Value Analysis for the Following Enterprise Applications of Blockchain Technology

To address the question of whether small and medium-sized enterprises (SMEs) should follow benchmark companies in establishing a blockchain-based information sharing platform, a two-tier supply chain decision-making problem dominated by retailers and containing two manufacturers of unequal status is analyzed, including the impact on the utility and social welfare of different game players in the supply chain and the supply chain as a whole, taking into account the fact that consumers are sensitive to both price and quality. For this purpose, traditional cooperation models, short-term and long-term models based on blockchain technology for information sharing were constructed and solved, respectively. The findings suggest that in the short term, the establishment of a blockchain technology-based information sharing platform will widen the status gap between manufacturers, making the strong stronger and the weak weaker, with retailers’ profits and social welfare suffering and no change in consumer surplus. In the long term, the quality improvement effect of information sharing will narrow the gap between manufacturers and increase members’ profits, with retailers and the entire supply chain experiencing a significant increase in profits after a short period of time, as well as an increase in consumer surplus and social welfare. In addition, when consumer price sensitivity and quality sensitivity are high, the establishment of a blockchain technology-based information sharing platform is beneficial for the stronger manufacturers, detrimental to the weaker manufacturers, and beneficial for the supply chain in the long term; otherwise, the absence of a blockchain technology-based information sharing platform is beneficial for the weaker manufacturers and the supply chain.

Right to Repair: Pricing, Welfare, and Environmental Implications

The “right-to-repair” (RTR) movement calls for government legislation that requires manufacturers to provide repair information, tools, and parts so that consumers can independently repair their own products with more ease. The initiative has gained global traction in recent years. Repair advocates argue that such legislation would break manufacturers’ monopoly on the repair market and benefit consumers. They further contend that it would reduce the environmental impact by reducing e-waste and new production. Yet the RTR legislation may also trigger a price response in the product market as manufacturers try to mitigate the profit loss. This paper employs an analytical model to study the pricing, welfare, and environmental implications of RTR. We find that, as the RTR legislation continually lowers the independent repair cost, manufacturers may initially cut the new product price and then raise it. This nonmonotone price adjustment may further induce a nonmonotone change in consumer surplus, social welfare, and the environmental impact. Strikingly, the RTR legislation can potentially lead to a lose–lose–lose outcome that compromises manufacturer profit, reduces consumer surplus, and increases the environmental impact despite repair being made easier and more affordable. This paper was accepted by Charles Corbett, operations management. Funding: Chen Jin gratefully acknowledges the Singapore Ministry of Education Academic Research Fund [Tier 1, Grant R-253-000-144-133]. Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2022.4401 .

Quality choice for product recovery considering a trade-in program and third-party remanufacturing competition

As an effective mode for product recovery, trade-in programs have been widely implemented in practice. With a trade-in program, an original equipment manufacturer (OEM) often faces a dilemma of determining the quality of new products, where quality is defined as an observable characteristic that increases consumers' willingness to pay for a product. On the one hand, for the OEM, a choice of higher quality can increase the perceived value of new products; on the other hand, it can also raise the cost of product recovery. In response, we develop game models considering the duopoly situation where an OEM offers a trade-in program to collect used products and faces competition from a third-party remanufacturer (TPR). Specifically, the proposed models capture how an OEM utilizes product quality to compete with a TPR under the presence and absence of a trade-in program. We derive the OEM's optimal quality choice and investigate the effect of the trade-in program and third-party remanufacturing in the Nash equilibrium. Furthermore, we examine how firms' profits and consumer surplus change in the trade-in program through a numerical study. Results indicate that the OEM almost always increases product quality in the trade-in context. Therefore, it is profitable for the OEM to implement the trade-in program to exploit repeat consumers and achieve price discrimination. Interestingly, the trade-in program is a profitable strategy against the TPR, but it is not necessarily detrimental to the TPR. Besides, the trade-in program can offset the positive effect of third-party remanufacturing on consumer surplus.

Traffic and Welfare Impacts of Credit-Based Congestion Pricing Applications: An Austin Case Study

This study seeks smart credit-based congestion pricing (CBCP) solutions for maximally improving travelers’ welfare by varying toll levels and locations across the Austin, Texas network. Scenarios evaluated include selecting links with maximum delays by variably tolling bridges and by recognizing congestion externalities across all links. Travel demand models deliver inputs for normalized logsum differences to quantify and compare consumer surplus changes across traveler types, around the region. Results suggest limited tolling locations under four broad times of day can do more harm than good, unless travelers shift out of the PM and AM peak periods or revenues are returned to travelers as credits. When using CBCP across all congested links at congested times of day (with 10% of revenues retained to cover system administrative costs), an average net benefit of $1.61 per licensed driver per weekday is estimated, with almost all travelers benefiting. For example, 95% of the traffic analysis zones’ lowest value of travel time (VOTT) group (VOTT1 = $5/hour) are expected to benefit from the CBCP policy. Tolling at twice the difference between marginal social cost and average travel cost (on each subset of congested links) appears to benefit more people, although tolling high on various links adds to congestion elsewhere. For example: tolling Austin’s highest-delay-producing or “top 500” links is estimated to benefit 98.5% of the zones’ highest VOTT (VOTT5 = $45/hour) travelers, while raising vehicle-miles traveled by just 0.8% (as a result of more circuitous, congestion- and toll-avoiding travel).

Right to Repair: Pricing, Profit, Welfare, and Environmental Implications

The right to (RTR) movement calls for government legislation that requires manufacturers to provide repair information, tools, and parts so that consumers can independently repair their own products with more ease. The initiative has gained global traction in recent years. Repair advocates argue that such legislation would break manufacturers’ monopoly on the repair market and benefit consumers. They further contend that it would reduce the environmental impact by reducing e-waste and new production. Yet, the RTR legislation may also trigger a price response in the product market as manufacturers try to mitigate the profit loss. This paper employs an analytical model to study the pricing, welfare, and environmental implications of RTR. We find that as the RTR legislation continually lowers the independent repair cost, manufacturers may initially cut the new product price and then raise it. This non-monotone price adjustment may further induce a non-monotone change in consumer surplus, social welfare, and the environmental impact. Strikingly, the RTR legislation can potentially lead to a \lose-lose-lose outcome that compromises manufacturer profit, reduces consumer surplus, and increases the environmental impact, despite repair being made easier and more affordable.

CONSUMER SURPLUS CHANGING IN THE TRANSITION FROM STATE NATURAL MONOPOLY TO THE COMPETITIVE MARKET IN THE ELECTRICITY SECTOR IN THE DEVELOPING COUNTRIES: AZERBAIJAN CASE

The objectives of the study are to analyze changes in consumer surplus and protect the social interest of poor households in the transition from a state monopoly over the electricity sector to the market. For this purpose, the volume of household electricity consumption by various incomes was calculated, the electricity demand function of households and the marginal cost of generating electricity were constructed. A methodology is given for calculating the electricity demand function for households and prices in an equilibrium market. The consumer surplus and its change are calculated. As well as there are given some recommendations to reduce the social burden for certain household groups while raising prices in the transition from a monopoly to the market, and the amount for the state subsidy for poor households. Keywords: consumer surplus, producer surplus, electric power sector, pricing, marginal cost, average costs JEL Classifications: D42 , L51 DOI: https://doi.org/10.32479/ijeep.8909

A welfare analysis of China's tariffs on U.S. hardwood products

China has been the top importer of U.S. log and lumber since 2010. With the ongoing trade disputes between the U.S. and its trading partners, especially with China, it is of great interest to assess the potential impacts of different trade interventions on U.S. forest sector. In this study, we focus on hypothetical uniform tariffs by China on U.S. hardwood products in four scenarios: tariffs imposed on log, lumber, and veneer, respectively, and on these products altogether. With an emphasis on U.S. timberland owners as log producers, a two-stage partial equilibrium displacement model is applied to measure the vertical linkage between log and its secondary products, lumber and veneer, as well as the horizontal linkage between lumber and veneer. Assuming a 25% uniform tariff, our results show that the welfare effects on stakeholders in four scenarios highly differ but U.S. timberland owners suffer substantial welfare loss as a whole in all scenarios. U.S. consumers of lumber and veneer, on the contrary, benefit from China's uniform tariffs in general. The total of China's consumer surplus is negative with its import tariffs on log, lumber, and all three products. Vertical and horizontal linkages within the U.S. hardwood sector are confirmed in all scenarios. Lastly, trade deflection effect is captured as the U.S. would export more hardwood products to the rest of world (ROW), resulting in positive but small changes in consumer surplus in the ROW, in all scenarios.

Channel Selection and Pricing Decisions Considering Three Charging Modes of Production Capacity Sharing Platform: A Sustainable Operations Perspective

In the context of sharing economy, a manufacturer can source from two alternative channels: sharing and traditional, when facing production capacity constraints and sustainably conscious consumers. The aim of the paper is to analyze channel selection and pricing strategies of the manufacturer for achieving sustainable operations, to investigate the operations of the platform regarding charging modes, access requirements, and commission rates in different stages of development, and to discuss the interaction among all stakeholders for sustainability in the whole system. The game-theoretic approach is adopted. The results provide references for decisions of the manufacturer and surplus production capacity supplier to join in the sharing, as well as corresponding optimal pricing strategies, which guides platforms to keep a balance between profitability and attracting participants by relatively low access requirements and commission rates. Moreover, developing platforms prefer to charge suppliers and set low access requirements while relatively developed platforms tend to charge bilateral sides or manufacturers and set high access requirements. Charging the manufacturer encourages the bilateral participation of the platform most. In addition, as charging mode changes, the trend of changes in consumer surplus and social welfare is the same as that in the market share of products from the sharing channel.

Using massive online choice experiments to measure changes in well-being

Gross domestic product (GDP) and derived metrics such as productivity have been central to our understanding of economic progress and well-being. In principle, changes in consumer surplus provide a superior, and more direct, measure of changes in well-being, especially for digital goods. In practice, these alternatives have been difficult to quantify. We explore the potential of massive online choice experiments to measure consumer surplus. We illustrate this technique via several empirical examples which quantify the valuations of popular digital goods and categories. Our examples include incentive-compatible discrete-choice experiments where online and laboratory participants receive monetary compensation if and only if they forgo goods for predefined periods. For example, the median user needed a compensation of about $48 to forgo Facebook for 1 mo. Our overall analyses reveal that digital goods have created large gains in well-being that are not reflected in conventional measures of GDP and productivity. By periodically querying a large, representative sample of goods and services, including those which are not priced in existing markets, changes in consumer surplus and other new measures of well-being derived from these online choice experiments have the potential for providing cost-effective supplements to the existing national income and product accounts.

Welfare evaluations and price indices with path dependency problems

In cases where multiple prices change, this paper develops methods for calculating compensating and equivalent variations from the prices, the consumption bundle, and the wealth elasticities of demand for goods. The methods are a natural extension and generalization of the method in Willig (Am Econ Rev 66(4):589–597, 1976), and have the ability to provide second-order approximations of compensating and equivalent variations. In addition, this paper considers two types of price paths: indifference price paths, along which utility levels are kept constant, and iso-price-ratio paths, along which prices change proportionally. Along these two paths, changes in consumer surplus, compensating variation, and equivalent variation are easily calculated, and that there are interesting and precise relationships among them. Furthermore, the methods and relationships above correspond to those of the Laspeyres–Konus and Paasche–Konus true cost of living price indices and the Divisia indices.

A review of computable general equilibrium models for transport and their applications in appraisal

In the transport planning process, decision makers require reliable and informative appraisals to facilitate comparisons and determine if a proposal is worthwhile to society. The cost–benefit analysis is the most common form of appraisal, where benefits are primarily measured from the change in consumer surplus in the transport market. However, these benefits will only reflect maximum social welfare if markets operate perfectly competitively and without any market failures. There may be significant uncaptured impacts, known as wider economic impacts, which agencies are beginning to incorporate in appraisals using ad-hoc methods. Computable general equilibrium (CGE) models are an increasingly popular method for assessing the economic impact of transport, including both direct and wider economic impacts, as they can determine the distribution of impacts among every market and agent in the economy by simulating the behaviour of households, firms and others from microeconomic first principles. Aside from their traditional role estimating changes in macroeconomic variables, CGE models can provide a measure of welfare that guarantees no double counting and accounts for nth order effects. This paper reviews the full range of CGE models that have been applied to transport issues and discusses their role in transport appraisal. CGE models for transport have been developed in urban, regional and environmental economics as well as other fields, and each field has applied its own theory, assumptions and practices to represent the relationships between transport and the economy relevant to the field. This paper also discusses the general role of CGE modelling in transport appraisal, as well as theoretical and practical concerns regarding CGE modelling practice.

Evaluating economic impacts of water deprivation in humanitarian relief distribution using stated choice experiments

This paper proposes a methodology to quantify the economic impacts of relief distribution after disasters based on discrete choice models. The research uses stated choice data about preferences for water purchases under different scenarios of deprivation. The economic impacts are estimated as the change in consumer surplus caused by the deprivation. The estimated models show that the social benefits for timely delivery of critical supplies are considerably larger than the market price under normal conditions. The findings suggest that disregarding the effects of deprivation, or incorrectly estimating the economic value of critical supplies such as water, is bound to produce a significant miss-allocation of resources. The results produced in this paper could be integrated into economically consistent humanitarian logistics mathematical models that could lead to optimal allocation and distribution of critical supplies.

Using Massive Online Choice Experiments to Measure Changes in Well-Being

GDP and derived metrics (e.g., productivity) have been central to understanding economic progress and well-being. In principle, the change in consumer surplus (compensating expenditure) provides a superior, and more direct, measure of the change in well-being, especially for digital goods, but in practice, it has been difficult to measure. We explore the potential of massive online choice experiments to measure consumers’ willingness to accept compensation for losing access to various digital goods and thereby estimate the consumer surplus generated from these goods. We test the robustness of the approach and benchmark it against established methods, including incentive compatible choice experiments that require participants to give up Facebook for a certain period in exchange for compensation. The proposed choice experiments show convergent validity and are massively scalable. Our results indicate that digital goods have created large gains in well-being that are missed by conventional measures of GDP and productivity. By periodically querying a large, representative sample of goods and services, including those which are not priced in existing markets, changes in consumer surplus and other new measures of well-being derived from these online choice experiments have the potential for providing cost-effective supplements to existing national income and product accounts.

Platform Recommendation in Search Markets: Theory and Evidence from the Mobile App Market

This paper investigates how a digital platform should select products for recommendation to meet different objectives. Specifically, we analyze a model of platform-based market where consumers search and purchase products that potentially differ in quality and taste dispersion. Our modeling framework elucidates how platform recommendation influences the market-level equilibrium outcomes, thereby in- forming the optimal recommendation strategy in the presence of product heterogeneity. We find that the quality and taste-dispersion dimensions can interact to affect the overall effectiveness of product recommendation strategies. Conditioning on taste dispersion, recommending high quality products in- creases both producer profits and consumer surplus. Conditioning on quality, recommending high taste- dispersion products may, however, increase or decrease producer profits depending on the joint effect of profit margin and purchase probability. The direction of change in consumer surplus is also un- certain—recommending a high taste-dispersion product is more likely to increase (decrease) consumer surplus if the quality is low (high). Importantly, we show that when the platform cannot discern product types, recommendation strategies based on observed price or sales signals cannot guarantee the optimal outcome in the general case.

Impacts of airline mergers on passenger welfare

Since 2005, the US airline industry has undergone a series of consolidations. We provide a comprehensive assessment of the overall effects of five major recent mergers on passengers’ welfare. We compute consumer surplus changes using passenger discrete choice models based on the attributes of airlines and routes. We then evaluate these changes, as well as changes in frequency and fare, using a difference-in-differences approach. Our major findings include large consumer welfare gains following the DL-NW and UA-CO mergers, welfare gains in regions dominated by the larger carrier in the merger, and welfare losses in highly concentrated markets following legacy mergers.

Welfare Measures to Reflect Home Location Options When Transportation Systems are Modified

Transportation system improvements do not provide simply travel time savings, for a fixed trip table; they affect trip destinations, modes, times of day, and, ultimately, home and business location choices. This paper examines the welfare (or willingness-to-pay) impacts of system changes by bringing residential location choice into a three-layer nested logit model to more holistically anticipate the regional welfare impacts of various system shifts using logsum differences (which quantify changes in consumer surplus). Here, home value is a function of home price, size, and accessibility; and accessibility is a function of travel times and costs, vis-à-vis all mode and destination options. The model is applied to a sample of 60 Austin, Texas, zones to estimate home buyers’ welfare impacts across various scenarios, with different transit fares, automobile operating costs, travel times, and home prices. Results suggest that new locators’ choice probabilities for rural and suburban zones are more sensitive to changing regional access, while urban and central business zone choice probabilities are more impacted by home price shifts. Automobile costs play a more important role in residential location choices in these simulations than those of transit, as expected in a typical U.S. setting (where automobile travel dominates). When generalized costs of automobile travel are simulated to rise 20%, 40%, and 60% (throughout the region), estimated welfare impacts (using normalized differences in logit logsum measures) for the typical new home buying household (with $70,000 in annual income and 2.4 household members) are estimated to be quite negative, at -$56,000, -$99,000, and -$132,000, respectively. In contrast, when auto’s generalized costs fall everywhere (by 20%, 40%, and then 60%), welfare impacts are very positive (+$74,000, $172,500, and $320,000, respectively). Such findings are meaningful for policymakers, planners, and others when anticipating the economic impacts of evolving transportation systems, in the face of new investments, rising travel demands, distance-based tolls, self-driving vehicles, and other changes.

Evaluating Transport User Benefits: Adjustment of Logsum Difference for Constrained Travel Demand Models

Transport user benefits are of great importance in cost–benefit analysis when transport projects are appraised. Generally, these benefits have the greatest effect on the results of cost–benefit analyses. It is common to adopt the consumer surplus for calculating transport user benefits. The consumer surplus measure is based on the underlying demand model and follows from the integration of the demand curve. If the popular logit model is used for forecasting travel demand, a consumer surplus measure takes a closed form that is easy to calculate. Furthermore, in cost–benefit analyses the change in consumer surplus between an initial and final state is needed; the change can be easily derived by the difference of the logsums of the two states. This logsum approach is proven and correct for travel demand models based on the logit model without multiple constraints. However, for travel demand models dealing with two or more sets of constraints, the logsum approach fails. In this paper, a mathematical approach is described for a transport user benefits measure that corresponds to the consumer surplus and is universal for all travel demand models with constraints. The measure for a doubly constrained trip distribution is derived. The applicability of the derived approach is shown by a simple example.

Evaluating the Possibility of a Water Trading Scenario Coupled With Water Use Restriction in the Texas Southern High Plains

Producers in the Texas Southern High Plains face the depletion of the Ogallala aquifer as groundwater withdrawals for irrigation have far exceeded recharge. Policy makers and stakeholders have been analysing various options in order to maintain adequate groundwater stock in the aquifer for future use. This study evaluated the possibility of implementing a water trading scenario coupled with water use restriction in the Texas Southern High Plains. The objective of this study was to examine the water use behaviour of agricultural producers and estimate the limits for the permit price and penalty for violation (when water use exceeds the restriction limit) for a water trading scenario in conjunction with water use restriction. This was accomplished using a non-linear dynamic optimization model for a planning horizon of 50 years. The results suggested that the decision of producers to engage in water trading introduced under a restricted management plan will be impacted by initial water levels in the aquifer, as well as the viability of pumping water when moving further into the planning horizon. The highest change in consumer surplus, price of permit, as well as the penalty of violation was observed in the periods where water becomes limiting and the overall supply of available water declines. It is evident that while management policies such as restricting water use and permitting water trading will have a definitive impact on the regional agricultural economy, they could still serve as useful tools to promote long term conservation of groundwater resources in the region.

Duopolio con costos de cambio y de retención. Efectos sobre el excedente del consumidor y el bienestar social

In a context of a market with free entry, we analyse the changes in consumer surplus, social welfare and the other equilibrium conditions when a competitor enters a monopolistic market where there is an established firm. We study the equilibrium in a duopolistic model by assuming that if the potential entrant decides to enter, there then follows a single period of Cournot-Nash quantity competition. We add retention costs in Klemperer model (1988) and, under certain assumptions about who bears these costs, we analyse and compare the results. Assume linear demand and that both firms have constant marginal costs. Work results are important for the analysis of the implications for welfare of regulatory policies. Finally, our work includes a simulation to test the theoretic model and to validate the relevant results in terms of social welfare, consumer surplus, profits and quantities in monopoly, duopoly with switching costs and duopoly with switching and retention costs.