Empirical Investigations of Contracting in Intermediate Markets

Abstract

My doctoral research focuses on empirical investigations of contracting in intermediate markets and its effects. I am currently pursuing two research projects that together constitute the chapters of this dissertation. The first chapter focuses on contracting between hospitals and insurers and a pricing practice in place in Maryland. In the second chapter, which is joint work with Julie Holland Mortimer and Sylvia Hristakeva, we instead investigate contracting practices in the national television advertising market. Chapter 1) In recent years researchers and policymakers have shown renewed interest in various types of health care reforms in the United States. In "Welfare Effects of Using Hospital Rate Setting as an Alternative to Bargaining" with Ayse Sera Diebel we investigate a potential health care reform. Prices paid by insurers to hospitals are determined by bilateral negotiations in all U.S. states except Maryland, where a unique all-payer rate setting health care regulation sets common prices for all insurers. Theory models of bilateral bargaining are unable to assign welfare effects when contracts are unobserved. We empirically analyze how a Maryland style regulation would affect overall welfare relative to bilateral bargaining, using the New Jersey health care market as an example. Using hospital-, insurer-, and patient-level data from 2010, we estimate a structural model of hospital and insurer demand, and simulate consumer and insurer responses to the new price regime. We find that replacing bargaining with all-payer rate setting increases total surplus in the market. However, not all agents benefit, and the effects depend on how the largest player in our market, Blue Cross Blue Shield (BCBS), sets premiums. If BCBS sets premiums a la Bertrand Nash, consumer surplus decreases, but joint hospital-insurer surplus increases by more. The number of uninsured increases by two percent. Surplus changes are robust to different pricing strategies of BCBS, that account for its non-profit status but, diminish the magnitude of surplus changes. Chapter 2) In "Contracts in the upfront market for national television advertising'' with Sylvia Hristakeva and Julie Holland Mortimer, we investigate unique pricing practices. We focus on advertising and treat it as an input to a firm's production process. The market of national television is of interest because it still commands the majority of advertising in the United States. Yet, firms face different costs when accessing the market for national television ads. Industry practices suggest that (legacy) firms with long histories of participation in the market benefit from favorable prices to reach the same audiences. We confirm empirically whether there are important differences in firms' costs to advertise nationally. Contracts between advertisers and networks are considered trade secrets, so we combine data on national ad placements and program viewership demographics with average ad prices in each program airing to perform our analysis. We find model-free evidence that firms who have longer relationships with broadcasters face lower prices in those networks. We use a structural model to quantify these price differentials, allowing for differences in firms' payoffs from advertising to different audiences. Preliminary results suggest that legacy firms obtain an 8\% discount relative to non-legacy firms. This discount translates into a $2 million efficiency that would be available to a non-legacy firm if it were to merge with a legacy firm.