| dc.description.abstract | This thesis comprises three essays on industrial organization. The first chapter, joint with Todd Lensman, studies the innovation of cancer drug combination therapies. Innovations often combine several components to achieve outcomes greater than the “sum of the parts.” We argue that such combination innovations can introduce an understudied inefficiency—a positive market expansion externality that benefits the owners of the components. We demonstrate the importance of this externality in the market for pharmaceutical cancer treatments, where drug combination therapies have proven highly effective. Using data on clinical trial investments, we document several facts consistent with inefficiently low private innovation: firms are less likely than publicly funded researchers to trial combinations, firms are less likely to trial combinations including other firms’ drugs than those including their own drugs, and firms often wait to trial combinations including other firms’ drugs until those drugs experience generic entry. Using microdata on drug prices and utilization, we quantify the externalities that arise from new combinations and find that the market expansion externality often dominates the standard negative business stealing externality, suggesting too little innovation in combination therapies. As a result, firms may have incentives to free ride off others’ innovation, which we analyze with a dynamic structural model of innovation decisions. We use the model to design cost-effective policies that advance combination innovation. Redirecting publicly funded innovation toward combinations with high predicted market expansion or consumer surplus spillovers minimizes crowd out of private investments, increasing the rate of combination innovation and total welfare while remaining budget neutral.
The second chapter, joint with Kelsey Moran and Thi Mai Anh Nguyen, studies the interoperability of electronic health record systems. Interoperability—the ability of different systems to work together—is an increasingly vital component of product markets. We study the impact of interoperability frictions in the context of US hospital Electronic Health Record (EHR) systems. While use of EHR systems is widespread, interoperability of these systems remains low, particularly across those produced by different EHR vendors. We examine how interoperability affects patients by considering both a direct, technological effect of influencing health information exchange and an allocative effect of shifting the flow of patients across providers. Using an event study design in which interoperability between hospital pairs changes when one changes EHR vendors, we find evidence for both channels. When two hospitals switch to having the same EHR vendor, charges and readmissions rates for patients who are transferred and referred between them decrease by 4% and 11%, respectively. In addition, these hospitals now share 8% more inpatient transfers and 9-10% more referrals. This change in patient flows further affects patient outcomes: patient health improves when their sending hospitals switch to EHR vendors used by higher-quality hospitals in the market and worsens when the opposite occurs. To quantify the welfare gain from reducing interoperability frictions, we estimate a demand model of how patients and providers trade-off interoperability with other receiving hospital characteristics when choosing where to send patients. The model is identified by changes in patient flows following changes in hospital EHR vendors and interoperability levels. We show that eliminating all interoperability frictions would redirect 7.5% of patients to different hospitals and increase joint hospital-patient welfare by 21%, the equivalent of a 57-kilometer reduction in travel distance.
The third chapter, joint with Roi Orzach, studies the relationship between the fares of direct and connecting flights. Airlines operate complicated flight networks, often utilizing hub-and-spoke systems to efficiently route connecting travelers and optimize costs. Despite the prevalence of connecting travelers—accounting for approximately one-third of passenger itineraries—most analyses of the welfare effects of changes in competition focus on nonstop routes. We show that when firms face capacity constraints or adjustment costs, a price decrease on a direct route may incentivize firms to decrease prices on indirect routes using this route as a leg. We document that this pass-through is positive using the price effects of low-cost carrier entry and airline mergers: connecting fares decrease after low-cost carrier entry on one of the legs and increase after a merger of carriers that competed on one of the legs. Our findings demonstrate that ignoring these network effects leads to significantly underestimating changes in consumer surplus—by up to 115%—in response to changes in competition. Thus, considering full airline networks is essential to accurately estimating the impact of changes in competition on consumers. | |
