Welfare Tradeoff Research Articles

Health care reform and the restructuring of the pharmaceutical industry

Aiming at containing total costs, recent health care reforms have transformed the organization of medical care. The majority of initiatives induce greater market transparency, budget responsibility and competence in decision making and so shift the system towards providing health rather than medication. Addressing the new market environment, pharmaceutical companies aim at efficiency improvements and skill enhancements, changes in product positioning to address opportunities in OTC markets and generic substitution, and horizontal and vertical arrangements for presumed scale and distribution. Most recent initiatives towards disease management foreshadow the fusion of focused drug development and capitated treatment into future efficient health care conglomerates. And yet, although companies restructure their industries in line with broader health care objectives, regulatory authorities still need to find ways to deal with adjustment cost. Most concerns are related to issues of market access, competitive behaviour and reliable information. In addressing these, health care providers and regulatory authorities face fundamental welfare trade-offs characterizing market-based and more centrally-administered solutions to managing care.

Can consumers benefit from a policy limiting the market share of a dominant firm?

This paper asks if consumers can possibly benefit from a policy limiting the market share of a dominant firm. In the near term the policy is bad for consumers because an output constraint on the dominant firm raises the current price. However, the policy stimulates investment in the competitive fringe sector. The policy might reduce the future price as the expanded fringe sector disciplines the future pricing behavior of the dominant firm. In such a case, however, the policy has a welfare trade-off for consumers: a cost in the current period and a benefit in the future period. This paper shows that the net effect on consumer welfare is negative in the leading case in which the dominant and fringe firms share the same technology. The analysis has applications for both domestic antitrust and international trade policies.

Stochastic innovation and product market organization

This paper analyzes how different types of product market organization affect firms' R&D investments in a stochastic innovation framework. Product market competition determines payoffs to successful and unsuccessful firms. Restrictions on the research project success probability distribution are identified that yield an invariance result for expenditure per R&D project. The impact of the number of firms (n) on the amount of market R&D is shown to be sensitive to product market organization. For a major process innovation, firms undertake more R&D projects under Cournot product market competition than under Bertrand competition, forn sufficiently large. A numerical example is used to illustrate welfare tradeoffs.

Oil Prices, Welfare Tradeoffs, and International Policy Coordination in a Three Region World Model: An Optimizing Approach

The first purpose of this paper is to derive optimal oil prices by recognizing that oil price changes affect real income oil importers and vice versa. International trade flows, income, and prices are endogenously determind in a three region world model (DCs, OPEC, Non-OPEN LDCs). Using Chow's method for stochasit control of a general nonlinear dynamic system, we then offer a characterization of the set of efficient cooperative policy strategies for the country blocks considered there, given a weights in the welfare function. We aslo examine the sensitivity of the optimal policy mix to changes in the weights of the welfare function.

The Consideration of Economies in Merger Cases

In recent merger cases under section 7 of the Clayton Act, the courts have taken the position that improvements in efficiency produced by the merger cannot be given consideration as a defense if the merger also produced anticompetitive effects. In fact, the existence of economies has usually been given added weight in the reasoning for disallowing merger. For example, the presence of economies in advertising was used in the reasoning which prohibited the merger of Procter and Gamble with Clorox.' While the courts have used the possibilities of economies as reasons for disallowing mergers, the Justice Department has accepted the notion that some mergers can be justified by cost savings even though there may be anticompetitive effects as well. According to Justice Department guidelines on horizontal mergers, different standards are used for highly concentrated markets where the four largest firms have 75 percent or more of industry output than for less highly concentrated markets where the four largest firms have less than 75 percent.2 The difference suggests implicit welfare tradeoffs in effect in these guidelines between anticompetitive effects and the possible benefits of economies for different market structures, but no clue is provided as to the criteria used in developing these tradeoffs. The view that economies can be used to offset anticompetitive effects also was expressed by Justice Harlan in his concurring opinion in the Clorox case. He writes, Where the case against the merger rests on the probability of increased market power the merging companies may attempt to prove that there are countervailing economies reasonably probable which should be weighed against the adverse effects.3 But again, while economies have been suggested for consideration in merger cases, there are no criteria given for judging at what point the anticompetitive effects are outweighed by the cost savings. In the following sections, a model will be developed which will attempt to determine the relevant tradeoff conditions. An appraisal of firm strategy in the tradeoff situation is also made. This model develops further an initial formulation constructed by 0. E. Williamson who concluded, Since a relatively large percentage increase in price is usually required to offset the benefits from a 5 to 10 percent reduction in average costs, the existence of economies of this magnitude is sufficiently important to give the antitrust authorities pause before disallowing such a merger.4 However, Williamson's conclusion is unwarranted * This paper was written at the Center for Research in Government Policy and Business at the University of Rochester. The author received helpful comments from Walter Oi and James Ferguson.

Size of Firm, Market Structure, and Innovation

Size of Firm, Market Structure, and Innovation