State Casket Sales and Restrictions: A Pointless Undertaking?

We utilize a new micro dataset of prices of funeral goods and services at individual funeral homes, plus data from the Census to examine the effects of state regulations that restrict entry into funeral goods market. In particular, some states have regulations that allow only licensed funeral homes to sell caskets, while others allow unlicensed retailers, such as Costco, to compete with funeral homes in the sale of caskets. However, as caskets and funeral services are complements, generally purchased in one-to-one proportions, it is not a priori clear that casket sale restrictions can expand the rent extraction capabilities of licensed funeral homes. Our results suggest that when courts lift funeral goods sales restrictions the prices of funeral goods fall but the prices of funeral services rise by nearly as much. Overall, our results support the "one monopoly rent" hypothesis; we do not find that overall funeral home revenues decline when funeral goods sales are lifted.

The Strategic Positioning of Store Brands in Retailer - Manufacturer Bargaining

We argue in this paper that retailers can strategically position store brands in product space to strengthen their bargaining position when negotiating supply terms with manufacturers of national brands. Using a bargaining framework we model a retailer's decision whether to carry an additional national brand or a store brand, and if the retailer chooses to introduce the latter, where in product space to locate the store brand. Store brands differ from other brands in being both unadvertised and located at a position in product space that is determined by the retailer instead of by a manufacturer. To capture the negotiation effect of store brands empirically, our paper analyses a retailer's choice of whether or not to carry a store brand in a given category. We control for other motivations for carrying a store brand that have been used in the literature. We test our model on a cross-section of categories using supermarket data from multiple retailers. The first contribution of this paper is to show theoretically that the strategic positioning of a store brand in a category changes the bargaining over supply terms between a retailer and national brand manufacturers in that category. The empirical evidence is consistent with the theory. We find that retailers are more likely to carry a store brand in a category if the share of the leading national brand is higher, but that the leading national brand share does not affect the market share of the store brand. This indicates that there may be a bargaining motive for the introduction of the store brand. We propose that this is because the retailer can position the store brand to mimic the leading national brand and present data that shows that store brands frequently imitate national brand packaging on multiple dimensions.

The Distortionary Effects of Government Procurement: Evidence from Medicaid Prescription Drug Purchasing

The federal-state Medicaid program insures 43 million people for virtually all of the prescription drugs approved by the FDA. To determine the price that it will pay for a drug treatment, the government uses the average price in the private sector for that same drug. Assuming that Medicaid recipients are unresponsive to price because of the program's zero co-pay, this rule will increase prices for non-Medicaid consumers. Using drug utilization and expenditure data for the top 200 drugs in 1997 and in 2002, we investigate the relationship between the Medicaid market share (MMS) and the average price of a prescription. Our findings suggest that the Medicaid rules substantially increase equilibrium prices for non-Medicaid consumers. Specifically, a ten percentage-point increase in the MMS is associated with a ten percent increase in the average price of a prescription. This result is robust to the inclusion of controls for a drug's therapeutic class, the existence of generic competition, the number of brand competitors, and the years since the drug entered the market. We also demonstrate that the Medicaid rules increase a firm's incentive to introduce new versions of a drug at higher prices and find empirical evidence in support of this for drugs that do not face generic competition. Taken together, our findings suggest that government procurement can have an important effect on equilibrium prices in the private sector.

How the Internet Lowers Prices: Evidence from Matched Survey and Auto Transaction Data

There is convincing evidence that the Internet has lowered the prices paid by some consumers in established industries, for example, term life insurance and car retailing. However, current research does not reveal much about how using the Internet lowers prices. This paper answers this question for the auto retailing industry. We use direct measures of search behavior and consumer characteristics to investigate how the Internet affects negotiated prices. We show that the Internet lowers prices for two distinct reasons. First, the Internet helps consumers learn the invoice price of dealers. Second, the referral process of online buying services, a novel institution made possible by the Internet, also helps consumers obtain lower prices. The combined information and referral price effects are -1.5%, corresponding to 22% of dealers' average gross profit margin per vehicle. We also find that buyers with a high disutility of bargaining benefit from information on the specific car they eventually purchased while buyers who like the bargaining process do not. The results suggest that the decisions consumers make to use the Internet to gather information and to use the negotiating clout of an online buying service have a real effect on the prices paid by these consumers.

Consumer Information and Price Discrimination: Does the Internet Affect the Pricing of New Cars to Women and Minorities?

Mediating transactions through the Internet removes important cues that salespeople can use to assess a consumer's willingness to pay. We analyze whether dealers' difficulty in identifying consumer characteristics on the Internet and consumers' ease in finding information affects equilibrium prices in car retailing. Using a large dataset of transaction prices for new automobiles, the first part of the paper an- alyzes the relationship between car prices and demographics. We find that offline African-American and Hispanic consumers pay approximately 2% more than other consumers, however, we can explain 65% of this price premium with differences in income, education,a nd search costs; we find no evidence of statistical race discrimination. The second part of the paper turns to the role of the Internet. Online minority buyers who use the Internet Referral Service we study, Autobytel.com, pay nearly the same prices as do whites, irrespective of their income, education, and search costs. Since members of minority groups who use the Internet may not be representative, we control for selection. We conclude that the Internet is disproportionately beneficial to those who have personal characteristics that put them at a disadvantage in negotiating. African-American and Hispanic individuals, who are least likely to use the Internet, are the ones who benefit the most from it.

Scarcity Rents in Car Retailing: Evidence from Inventory Fluctuations at Dealerships

Price variation for identical cars at the same dealership is commonly assumed to arise because dealers with market power are able to price discriminate among their customers. In this paper we show that while price discrimination may be one element of price variation, price variation also arises from inventory fluctuations. Inventory fluctuations create scarcity rents for cars that are in short supply. The price variation due to inventory fluctuations thus functions to efficiently allocate particular cars that are in restricted supply to those customers who value them most highly. Our empirical results show that a dealership moving from a situation of inventory shortage to an average inventory level lowers transaction prices by about 1% ceteris paribus, corresponding to 15% of dealers' average per vehicle profit margin or $250 on the average car. Shorter resupply times also decrease transaction prices for cars in high demand. For traditional dealerships, inventory explains 49% of the combined inventory and demographic components of the predicted price. For so-called 'no-haggle' dealerships, the percentage explained by inventory increases to 74%.

Internet Car Retailing

This paper investigates the effect of Internet car referral services on dealer pricing of automobiles in California. Combining data from J.D. Power and Associates and Autobytel.com, a major online auto referral service, we compare online transaction prices to regular street' prices. We find that the average customer of this online service pays approximately 2% less for her car, which corresponds to about $450 for the average car. Fifteen percent of the savings comes from making the purchase at a low-price dealership affiliated with the web service. The remaining 85$300 than an equivalent offline sale. However, because online consumers are cheaper to serve and online sales may be new business for the dealerships, web-affiliated dealers are likely to be better off. Consumers who use the web do better than at least 61% of offline consumers.

Cowboys or Cowards: Why are Internet Car Prices Lower?

This paper addresses the question of how much the Internet lowers prices for new cars and why. Using a large dataset of transaction prices for new automobiles and referral data from Autobytel.com, we find that online consumers pay on average 1.2% less than do offline consumers. After controlling for selection, we find that using Autobytel.com reduces the price a consumer pays by approximately 2.2%. This suggests that consumers who use an Internet referral service are not those who would have obtained a low price even in the absence of the Internet. Instead, our finding is consistent with consumers choosing to use Autobytel.com because they know that they would do poorly in the traditional channel, perhaps because they have a high personal cost to collecting information and bargaining. This group disproportionately uses Autobytel.com because its members are the ones with the most to gain. We estimate that savings to consumers who use Autobytel.com alone are at least $240 million per year. Since there are other referral and informational sites that may also help consumers bargain more effectively with dealers, we conclude that the Internet is facilitating a large transfer of surplus to Internet consumers in the retail auto industry.

The Strategic Response by Pharmaceutical Firms to the Medicaid Most-Favored-Customer Rules

In 1990 the Federal Government included a Most Favored Customer (MFC) clause in the contract (OBRA 90) which would govern the prices paid to firms for pharmaceutical products supplied to Medicaid recipients. The firms had to give Medicaid their best (lowest) price in some cases, a percentage below average price in others. Many theoretical models have shown that an MFC rule commits a firm to compete less aggressively in prices. We might expect prices to rise following the implementation of the MFC rule, yet the work done to date on OBRA 90 has found this result somewhat difficult to show empirically. I also conclude that the effects of the law are small and relatively weak; however, the results are strongest where the product's characteristics match the incentives in the law. I find that after the MFC rule was implemented the average price of branded products facing generic competition rose - the median presentation's price rose about 4%. Brands protected by patents did not significantly increase price. Generics in concentrated markets should display a strategic response to the brand's adoption of the MFC. I find support for the strategic effect; generic firms raise their prices more as their markets become more concentrated. I find little change in hospital prices. The results suggest that the MFC rule resulted in higher prices to some non-Medicaid consumers of pharmaceuticals.