Selected Economic Topics
Settlements in the Pharmaceutical Industry
In September 2008, I conducted an information session at the University of Virginia where the topic was An Analysis of Reverse Payments in the Pharmaceutical Industry, which is an area that I have conducted some work with colleagues over the last several years. This presentation provides an overiew on how to assess the competitive implications of a settlement between an incumbent pharmaceutical and a would-be generic.
Capacity Payments for Electric Generation
In evaluating the New England Independent System Operator (ISO-NE) proposal for locational installed capacity payments (LICAP) for electricity generation. The contemplated approach included an administratively determined demand curve for installed capacity. This demand curve was to a pronounced kink in it. The curve started out flat, then was sloped negatively, then kinked at a point that was the most "desired" level of capacity (where the long run cost of new capacity crossed the demand curve), then was flatter until the price reached zero. The excel file attached here demonstrates the basic shape.
In the model included in the spreadsheet above, we used Cournot to estimate the equilibrium that would have resulted from the LICAP proposal whereby capacity owners would have bid their capacity into this administrative market. The Cournot equilibria are shown by the red squares along the demand curve. We compared this with the equilibrium that would have resulted if all capacity bid at a cost of zero, or a perfectly competitive result (since the marginal cost of bidding was essentially zero). Interestingly, because of the kinked nature of the administratively drawn demand curve, we found a Cournot solution along each portion of the kinked demand curve given reasonable assumptions about the size of the competitors. For some of the smaller geographic areas (that would have had their own bidding process and resulting price), we found that the Cournot model predicted that the resulting price would have been the maximum price allowed given the size of the participants (see the NEMA sheet).