Essays on Economics of Technology-Enabled Intermediaries

Abstract

The dissertation consists of three essays that examine a number of economic aspects of technology-enabled intermediaries. The first essay studies the effect of asymmetry in platform-technology on competition and collaboration between intermediaries in two-sided markets. I find that collaboration between rivals in the form of direct or indirect inter-network access can lead to Pareto improvements in profits, with or without monetary transfers between them. Such improvements are most likely when the technological asymmetry between rivals is large, or the incumbent has a large installed base. Technology licensing deals are not possible without a pre-existing installed base for the inferior technology platform, but these too become more attractive with larger installed bases and technological asymmetry. The second and third essays focus on issues related to a specific kind of procurement intermediaries, known as Group Purchasing Organizations (GPOs). Hospitals in the United States join GPOs to improve procurement efficiencies and get deeper group discounts contracted for by GPOs. Some members further negotiate directly with the same vendors. The common perception is that hospitals benefit from such directly-established "custom contracts" as they yield prices lower than the GPO-negotiated prices. In the second essay, using a game-theoretic model, I find that allowing custom contracts benefits vendors at the expense of hospitals. I show how, with the provision for custom contracts, GPOs act as demand aggregators for small hospitals, and information intermediaries for the rest. The third essay explores the economic rationale behind compliance-based pricing in GPO contracts. The common perception is that higher purchase volume leads to lower unit price. I show that a vendor's fixed cost of managing an active B2B account and the heterogeneity in product preferences within the hospital can largely drive such compliance-based pricing. Interestingly, I find that it is possible for a hospital to get a lower price even when it buys fewer units, as compared to another hospital which is buying more from the same vendor but not fulfilling its entire demand from that vendor. I also show that, in certain cases, such pricing may not only decrease procurement cost but also increase social surplus.