Job Market Paper
Incumbent Response to Product Differentiation by Entrants: Evidence from Consumer Packaged Goods
[Draft under review by data provider – Click here to request a draft]
Over the last 20 years the consumer packaged goods (CPG) industry has seen a wave of entry from small “independent” firms. Large “legacy” firms have responded to this entry by both acquiring independent producers and introducing new brands that closely resemble the characteristics of independent-made products. I study this phenomenon in two product categories: yogurt and beer. Using grocery scanner data and a novel empirical characterization of the product space, I first document how firm product portfolios evolved from 2006 to 2020. I then estimate a dynamic oligopoly model in which firms invest in both their product portfolios and geographic footprints across different market segments (e.g. craft beer). Finally, I present counterfactual analysis in which legacy producers are barred from entering new market segments. I find that independent yogurt producers would have increased investment enough to leave overall variety/product availability unchanged. In beer however, I find that barring legacy entry would have led to substantially lower variety/availability, likely leaving consumers worse off. In the context of the model, this difference is because increased profits from less direct competition outweighed one-time investment costs for independent yogurt producers, which was not the case in beer.
Published Papers
“The Health Costs of Cost-Sharing” with Amitabh Chandra and Ziad Obermeyer
The Quarterly Journal of Economics, Volume 139, Issue 4, November 2024, Pages 2037–2082, https://doi.org/10.1093/qje/qjae015
Abstract: What happens when patients suddenly stop their medications? We study the health consequences of drug interruptions caused by large, abrupt, and arbitrary changes in price. Medicare’s prescription drug benefit as-if-randomly assigns 65-year-olds a drug budget as a function of their birth month, beyond which out-of-pocket costs suddenly increase. Those facing smaller budgets consume fewer drugs and die more: mortality increases 0.0164 percentage points per month (13.9%) for each $100 per month budget decrease (24.4%). This estimate is robust to a range of falsification checks and lies in the 97.8th percentile of 544 placebo estimates from similar populations that lack the same idiosyncratic budget policy. Several facts help make sense of this large effect. First, patients stop taking drugs that are both high value and suspected to cause life-threatening withdrawal syndromes when stopped. Second, using machine learning, we identify patients at the highest risk of drug-preventable adverse events. Contrary to the predictions of standard economic models, high-risk patients (e.g., those most likely to have a heart attack) cut back more than low-risk patients on exactly those drugs that would benefit them the most (e.g., statins). Finally, patients appear unaware of these risks. In a survey of 65-year-olds, only one-third believe that stopping their drugs for up to a month could have any serious consequences. We conclude that far from curbing waste, cost sharing is itself highly inefficient, resulting in missed opportunities to buy health at very low cost ($11,321 per life-year).