How Do Governments Engage in Price Discrimination? Evidence from a Large-Scale Nationalization (with Francisco Pareschi)
AbstractState-owned enterprises (SOEs) have the potential to correct market failures, but they are also subject to the influence of politics and interest groups. We examine this trade-off in the context of the nationalization of the leading gasoline company in Argentina. Descriptive analysis suggests that pricing patterns changed after the nationalization. First, the government exerted less market power, charging lower prices on average. Second, it engaged in less economic price discrimination, reducing the correlation between prices and consumers’ willingness to pay. Third, it engaged in political price discrimination, charging lower prices in provinces with political connections with the state-owned firm. We develop and estimate a model of gasoline supply and demand under market power and recover the government’s objective function. We find that public provision leads to welfare gains but is also associated with political motives. Compared to a benevolent planner—that internalizes the welfare of all consumers and firms equally— the government sets prices as if it only cares about specific groups: middle-income households in general and low-income households in provinces with political connections. Lastly, we study the company’s response to policy alternatives, including pricing rules that are in place in government agencies worldwide. Our findings show that rules effectively reduce the influence of politics in pricing but are associated with higher costs: they mitigate half of the welfare gains generated by the nationalization and increase the taxpayers’ burden by 10%. These findings emphasize the importance of politics in shaping governments’ decisions and the role of SOEs as instruments for redistribution.
Reducing Consumer Inertia in Tobacco Markets (with Francisco Pareschi)
AbstractWe study the equilibrium effects of tobacco control policies. Despite decades-long efforts to discourage smoking, the tobacco industry remains resilient. One of the main reasons is consumers’ attachment to the products they smoke, which we call consumer inertia. We explore two reasons consumers are attached to their products: they get addicted to nicotine and develop lasting brand loyalty to their products. Recently, regulators have proposed some policies that would eliminate the addictive components of cigarettes and others that make consumers less loyal to their brands. Although such policies would directly impact consumers, we must understand firms’ responses to assess their impact on consumption. Consumer inertia introduces dynamic incentives for the firms since future demand depends on current choices. As a result, consumers become a valuable asset for the firm, which modifies how they price, introduce, and discontinue products. To assess the empirical effect of reducing inertia in tobacco markets, we develop a model that accounts for consumers and firm responses: consumers have addiction and loyalty, and firms choose prices and product portfolios. We estimate the model leveraging rich variation from the Uruguayan industry and solve the dynamic game for multiple counterfactual levels of inertia. We find that firms’ responses are unlikely to reverse the direct effect on consumers, even though lowering inertia makes customers more price-responsive and can facilitate entry. Decreasing inertia also discour- ages firms from lowering prices to attract customers, which acts as a countervailing force to increased competition and product availability. Even when the policies do backfire, the effect on consumption remains small because of this offsetting force.
Selected Work in Progress
Tax Competition and Spatial Misallocation: Evidence from a Tax Decentralization Reform
AbstractWhy do different governments set different taxes, and how does that affect the allocation of consumptions and firms across the space? I explore this question in the context of a tax decentralization reform in Argentina, in which municipalities were allowed to charge gasoline sales taxes. I document substantial heterogeneity in tax choices by different municipalities. Moreover, descriptive evidence indicates that the policy affects the spatial reallocation of consumption and firms towards municipalities that set lower taxes. Motivated by these findings, I build and estimate a model of strategic taxation between municipalities. In the proposed model, municipalities simultaneously choose taxes to maximize an unobservable welfare function, which we estimate from the data. Given tax decisions, gasoline stations set prices, and consumers seek gasoline. I estimate the model using insights from Lopez and Pareschi (2023). I show that equilibrium effects and strategic interactions exacerbate spatial misallocation. The higher preferences for tax collection of a local government negatively affect consumers in nearby municipalities due to equilibrium effects in prices. Moreover, the higher the taxes are in nearby municipalities, the more incentives each municipality has to increase taxation, leading to a race to the top equilibria
Entry Under Demand Spillovers: Evidence from the Healthcare Industry