DP15279 Pricing above value: selling to an adverse selection market

Author(s): Jan Boone
Publication Date: September 2020
Keyword(s): Adverse Selection, pharmaceutical prices, pricing above value, risk equalization, Vertical Relations
JEL(s): I11, I13
Programme Areas: Public Economics, Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15279

This paper shows that it is possible for intermediate goods to be priced above the value that the good has for final consumers. This happens in sectors selling to adverse selection markets where the cost difference between consumer types is dominated by their elasticity difference. High input prices then help to separate consumer types. An increase in competition can raise prices further. We use the example of pharmaceutical companies selling drugs to a health insurance market at prices exceeding value. Another feature of the model is an excessive private incentive to reduce market size, e.g. in the form of personalized medicine.