Working Papers

How Do Governments Engage in Price Discrimination? Evidence from a Large-Scale Nationalization (with Francisco Pareschi)

Abstract State-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)

Abstract We 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

Abstract Why 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

Abstract Historically, policymakers in the US have raised concerns that unregulated competition among healthcare providers can lead to the excessive introduction of costly services and facilities. Based on this hypothesis, many states have established Certificate of Need (CON) Laws, which regulate the provision of new services. In this paper, we provide a rationale for this regulation rooted in the existence of complementarities on the demand side. If consumers find buying multiple products at the same place convenient, providing a new product can generate additional demand for other products (i.e., demand spillovers). In a competitive environment, this dynamic creates enhanced incentives to introduce new services, making overprovision likely. On the other hand, the existence of complementarities on the demand side implies that restricting entry into one service can make markets for other services more concentrated. Using data from Medicare, I document the existence of complementarities on the demand side. I focus on radiotherapy facilities that are part of cancer treatments and under CON regulations in many states. Data shows that consumers require different services during illness and concentrate their consumption on a single provider. I also document that providers increase their demand for additional services (such as chemotherapy and surgery) after introducing radiotherapy facilities. Motivated by these findings, I build a framework to study the benefits and costs of regulating entry in the presence of demand spillovers. On the demand side, consumers require different services during an illness and pay shopping costs for using multiple providers. On the supply side, firms decide whether or not to offer a new service and negotiate prices with insurers. Adding a new service has three effects on hospital revenues: it attracts more patients, it changes the patient mix, and it allows hospitals to negotiate higher payments with insurers. Preliminary results suggest complementarities on the demand side exist and that excessive entry is likely. However, the model also shows that restricting entry into radiotherapy lessens competition in related services, leading to higher prices.