Pricing Above Value: Selling to an Adverse Selection Market

43 Pages Posted: 22 Sep 2020

See all articles by Jan Boone

Jan Boone

Tilburg University - Center for Economic Research (CentER); Centre for Economic Policy Research (CEPR); TILEC

Multiple version iconThere are 2 versions of this paper

Date Written: September 2020

Abstract

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.

Keywords: Adverse Selection, pharmaceutical prices, pricing above value, risk equalization, Vertical Relations

JEL Classification: I11, I13

Suggested Citation

Boone, Jan, Pricing Above Value: Selling to an Adverse Selection Market (September 2020). CEPR Discussion Paper No. DP15279, Available at SSRN: https://ssrn.com/abstract=3696360

Jan Boone (Contact Author)

Tilburg University - Center for Economic Research (CentER) ( email )

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Centre for Economic Policy Research (CEPR)

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TILEC ( email )

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Tilburg, 5000 LE
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