Generalized Insurer Bargaining

Under Review
Guy Arie, Paul L. E. Grieco, Shiran Rachmilevitch

We incorporate repeated interaction and limits on the number of simultaneous negotiations by the same insurer into the standard multi-lateral insurer-hospital Nash-In-Nash (NiN) bargaining model. This approach is motivated by our finding that under common assumptions, the NiN model predicts a market breakdown with sufficiently high hospital bargaining power. In our proposed model all hospitals that increase surplus join the insurer network.
Our generalized model can be estimated as in Gowrisankaran et al. (2015) with one additional parameter — the players’ discount factor. If players are completely impatient, the estimation outcome is the same in both models. We identify the differences in estimation results between the two models and show that mergers that would be approved using the NiN model may be rejected using the general model.

Who Pays for Switching Costs?

Published
Guy Arie, Paul L. E. Grieco
Quantitative Marketing and Economics, December 2014, Volume 12, Issue 4, pp 379-419

Earlier work characterized pricing with switching costs as a dilemma between a short-term “harvesting” incentive to increase prices versus a long-term “investing” incentive to decrease prices. This paper shows that small switching costs may reduce firm profits and provide short-term incentives to lower rather than raise prices.
We provide a simple expression which characterizes the impact of the introduction of switching costs on prices and profits for a general model. We then explore the impact of switching costs in a variety of specific examples which are special cases of our model. We emphasize the importance of a short term “compensating” effect on switching costs.
When consumers switch in equilibrium, firms offset the costs of consumers that are switching into the firm. If switching costs are low, this compensating effect of switching costs causes even myopic firms to decrease prices. The incentive to decrease prices is even stronger for forward looking firms.

SSRN link

Dynamic Costs and Moral Hazard

Published
Guy Arie
Journal of Economic Theory (2016), pp. 1-50 DOI information: 10.1016/j.jet.2016.08.002

The marginal cost of effort often increases as effort is exerted. In a dynamic moral hazard setting, dynamically increasing costs create information asymmetry. This paper characterizes the optimal contract and helps explain the popular yet thus far puzzling use of non-linear incentives, for example in sales-force compensation. The result is obtained by complementing the standard dynamic program with a novel dynamic dual formulation. The dual program is monotonic and sub-modular, providing stronger results, including a proof for the sufficiency of one shot deviations.

Article on JET

Working paper version on SSRN

The Competitive Effect of Multimarket Contact

Published
Guy Arie, Sarit Markovich, Mauricio Varela
European Economic Review, Volume 100, 2017

Changes in the extent of multi-market contact (MMC) between firms often affect market outcomes — quantities and prices. This paper challenges the standard economic interpretation of this phenomenon as an indication of tacit collusion. We show that a strategic but purely competitive effect of changes in MMC can change the quantity provided in a market by a firm by as much as 50%, and the prices a firm sets by as much as 20%.
This may have important welfare implications, specifically with regards to horizontal mergers. Studying mergers that span several markets, we show that a myopic merger policy may thwart a surplus-increasing merger wave.

SSRN link