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Co-authored with Harsh Gupta
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Abstract:
We study how two common market failures-market power and choice frictions-shape the welfare effects of a large-scale pharmaceutical price control policy in India. The policy reduced the prices of regulated drugs by 24% and increased their sales by 36%, with minimal impact on product entry or exit. A standard revealed-preference welfare analysis suggests substantial gains in consumer and social surplus, as price caps correct monopoly distortions. However, using a survey of physicians' own drug choices, we show that consumers systematically overvalue regulated products. Incorporating these choice frictions reduces estimated consumer surplus gains by 30% and reveals an overall decline in social welfare. We also evaluate alternative price and non-price regulations that address both market failures.
Bio:
Shengmao is an applied microeconomist working on empirical industrial organization, health economics, and the Chinese economy. His recent work focuses on pricing, regulation, and innovation in pharmaceutical markets. Shengmao is an Assistant Professor of Strategy at the Kellogg School of Management. He received his Ph.D. in Economics from Stanford University in June 2022.
Website: https://www.shengmao-cao.com/