No Free Lunch? Welfare Analysis of Firms Selling Through Expert Intermediaries

95 Pages Posted: 3 Aug 2018 Last revised: 6 Aug 2020

See all articles by Matthew Grennan

Matthew Grennan

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

Kyle Myers

Harvard University - Technology & Operations Management Unit

Ashley Swanson

Columbia University - Columbia Business School; NBER

Aaron Chatterji

Duke University - Fuqua School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: August 4, 2020

Abstract

We study how firms target and influence expert intermediaries, and the welfare impact of banning those relationships. In the case study we investigate, manufacturers of statins, a class of cholesterol-lowering drugs, provide meals and other payments to physicians. Leveraging variation in exposure to spillovers from academic medical centers’ conflict-of-interest policies for identification, we estimate significant heterogeneity in the effects of payments on prescribing, with firms targeting highly responsive physicians. Payments offset the negative effects of oligopoly pricing and other frictions on utilization, but at great expense to consumers and insurers because payments promote high-price branded drugs. To understand the net effects of payments in the presence of various factors that may drive a wedge between physicians’ decisions and patients’ best interests, we introduce a decision error into our framework and explore the assumptions under which payments benefit consumers. We calibrate this decision error using clinical trial results on statin effectiveness for a similar population. This exercise suggests that, in the case of statins, firm payments to physicians benefit consumers due to significant underprescribing at baseline.

Keywords: Expert Intermediaries, Pharmaceuticals, Payments, Decision Errors, Welfare Analysis

JEL Classification: I1, L00

Suggested Citation

Grennan, Matthew and Myers, Kyle and Swanson, Ashley and Chatterji, Aaron, No Free Lunch? Welfare Analysis of Firms Selling Through Expert Intermediaries (August 4, 2020). Available at SSRN: https://ssrn.com/abstract=3216172 or http://dx.doi.org/10.2139/ssrn.3216172

Matthew Grennan (Contact Author)

University of Pennsylvania - The Wharton School ( email )

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National Bureau of Economic Research (NBER) ( email )

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Kyle Myers

Harvard University - Technology & Operations Management Unit ( email )

Boston, MA 02163
United States

Ashley Swanson

Columbia University - Columbia Business School ( email )

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New York, NY 10027
United States

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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Aaron Chatterji

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States

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