SMU SOE Seminar Series (November 28, 2025): A Dynamic Theory of Preference for Flexibility

TOPIC:

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.

Keywords: Price Controls, Imperfect Competition, Product Quality, Pharmaceuticals.

JEL: I11, L13, L15, L51, L65.

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