Pricing Above Value: Selling to an Adverse Selection Market
Posted: 25 Sep 2020
Date Written: September 09, 2020
This paper shows that it is possible for intermediate goods to be priced above the value that the good has 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, pricing above value, vertical relations, pharmaceutical prices, risk equalization
JEL Classification: I13, I11
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