Pricing above Value: Selling to an Adverse Selection Market

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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.
Original languageEnglish
Place of PublicationTilburg
PublisherCentER, Center for Economic Research
Number of pages41
Volume2020-023
Publication statusPublished - 23 Sep 2020

Publication series

NameCentER Discussion Paper
Volume2020-023

Keywords

  • adverse selection
  • pricing above value
  • vertical relations
  • pharmaceutical prices
  • risk equalization

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  • Cite this

    Boone, J. (2020). Pricing above Value: Selling to an Adverse Selection Market. (CentER Discussion Paper; Vol. 2020-023). CentER, Center for Economic Research.