Crestor, an important but controversial cholesterol-lowering drug, is contraindicated for use by senior and Asian patients. In this paper, we exploit this fact and a unique doctor-level prescription and advertising exposure data for statin drugs to examine the hypothesis of informative advertising. Our tests are based on the intuition that, if advertising is informative, it should lead to fewer contraindicated matches: Doctors should prescribe the drug less frequently to patients with characteristics for which the drug is contraindicated. We find strong evidence for the informative-advertising hypothesis: The match quality signaled by doctor-level advertising for contraindicated patients is significantly inferior to that signaled for the other patients. Our results are robust to the potential endogeneity in doctor-level advertising.
Invest in Information or Wing It? A Model of Dynamic Pricing with Seller Learning. First version: 2012, new version: 2015. Revise and Resubmit, at the Management Science. (with Hong Luo and Jing Xia).
Pricing idiosyncratic products is often challenging because the seller, ex ante, lacks information about the demand for individual items. This paper develops a model of dynamic pricing for idiosyncratic products that features the optimal stopping structure and a seller that learns about item-specific demand through the selling process. The model is estimated using novel panel data of a leading used-car dealership. Policy experiments are conducted to quantify the value of the demand information that the dealer obtains through the initial assessment and subsequent learning in the selling process. With the dealer’s average net profit per car in the estimation sample being around $1150, the initial assessment is worth around $101, and the subsequent learning in the selling process helps improve the dealer’s profit by at least $269. These estimates suggest a potentially high return to taking the “information-based” approach to pricing idiosyncratic products.
Is Advertising Informative? Evidence from Contraindicated Drug Prescriptions, 2012. (with Matt Shum and Wei Tan).
Short-Run Needs and Long-Term Goals: A Dynamic Model of Thirst Management (with Ahmed Khwaja and K. Sudhir), Marketing Science, 2015.
Beverage consumption occurs many times a day in response to a variety of needs that change throughout the day. In making their choices, consumers self-regulate their consumption by managing short run needs (e.g., hydration and mood pickup) with long-term goals (e.g., health). Using unique intra-day beverage consumption, activity and psychological needs data, we develop and estimate a model of high frequency consumption choices that accounts for both intra-day changes in short run needs and individual level unobserved heterogeneity in the degree of self-regulation. A novel feature of the model is that it allows for dynamics of consumption and stockpiling at the level of product attributes. The model is used to evaluate introduction of new products in the beverage category and gain insight into the linkage between self-regulation and excess consumption. Broadly, the modeling framework of balancing short run needs with long-term goals has wide ranging applications in choices where long term effects are gradual (e.g., nutrition, exercise, smoking and preventive health care).
Estimating Production Functions with Robustness Against Errors in the Proxy Variables, 2011. (with Yingyao Hu). Revise and Resubmit, at the Review of Economic Studies.
This paper proposes a new semi-nonparametric maximum likelihood estimation method for estimating production functions. The method extends the literature on structural estimation of production functions, started by the seminal work of Olley and Pakes (1996), by relaxing the scalar-unobservable assumption about the proxy variables. The key additional assumption needed in the identification argument is the existence of two conditionally independent proxy variables. The assumption seems reasonable in many important cases. The new method is straightforward to apply, and a consistent estimate of the asymptotic covariance matrix of the structural parameters can be easily computed.
What Makes Insurance Companies Voluntarily Share Their Proprietary Customer Information. 2011.
This paper provides a novel game-theoretic explanation for why voluntary information-sharing arrangements in the insurance and banking industry can be self-enforcing---namely, why the information exchanges, organized as independent for-profit corporations, can count on insurance companies and banks to continue to report their private customer information to them.
Posted Price and Haggling in the Used Car Market. 2009. (new version coming soon.)
Though haggling has been the conventional way for auto retailers to sell cars, the last two decades have witnessed the systematic adoption of no-haggle prices by many large dealerships, including the largest used car dealership, Carmax. This paper develops a structural empirical model to estimate sellers' profits under posted price and haggling, and investigates how market conditions affect sellers' optimal pricing formats. The model incorporates a simple class of bargaining mechanisms into the standard BLP model. With the extension, the product-level demand system is estimated using data with only list prices, and the unobserved discounts obtainable in haggling are also recovered in the estimation. The counterfactual experiments based on the estimates yield a few interesting findings. First, dealers' adopted pricing formats seem superior to the alternative ones. Second, dealers enjoying larger market power through vertical differentiation and carrying a large number of models are more likely to have posted price as their optimal pricing format.
Work in Progress
Dynamic Incentives and Pay-for-Performance Contracts with Risk-Averse Agents. with K. Sudhir.
Advertising with Endogenous Information Acquisition.