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The Distribution and Pricing of Prescription Drugs

Author

Listed:
  • Kenneth Elzinga
  • David Mills

Abstract

Scherer (Scherer, F.M., "How US Antitrust Can Go Astray: The Brand Name Prescription Drug Litigation", International Journal of the Economics of Business, 1997, 4, 3, 000-000) uses the conventional economic model of third-degree price discrimination to analyze the pharmaceutical industry's practice of selling prescription drugs at discounted prices to hospitals and managed care entities. In this framework, prescription drug discounts appear to make some consumers (those in the managed care sector) better off and other consumers (those outside the managed care sector) worse off. While illuminating, this analysis neglects two important aspects of pharmaceutical pricing. First, it neglects the active role hospitals and managed care organizations play in making the demand for drugs more elastic. Second, the sellers of prescription drugs, as a rule, are oligopolists, not monopolists as the price discrimination model assumes. In this paper, we incorporate these two characteristics of pharmaceutical markets in an analysis of prescription drug pricing and conclude that discounts increase consumer welfare in the managed care sector but do not reduce consumer welfare in the traditional retail pharmacy sector

Suggested Citation

  • Kenneth Elzinga & David Mills, 1997. "The Distribution and Pricing of Prescription Drugs," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 4(3), pages 287-300.
    • Handle: RePEc:taf:ijecbs:v:4:y:1997:i:3:p:287-300
    DOI: 10.1080/758523211
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    Citations

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    Cited by:

    1. Jeremy Bulow & Paul Klemperer, 1998. "The Tobacco Deal," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1998 Micr), pages 323-394.
    2. Sara Fisher Ellison & Christopher M. Snyder, 2010. "Countervailing Power In Wholesale Pharmaceuticals," Journal of Industrial Economics, Wiley Blackwell, vol. 58(1), pages 32-53, March.
    3. Elamin H. Elbasha, 2003. "Deadweight loss of bacterial resistance due to overtreatment," Health Economics, John Wiley & Sons, Ltd., vol. 12(2), pages 125-138, February.
    4. Alan T. Sorensen, 2003. "Insurer‐hospital bargaining: negotiated discounts in post‐deregulation connecticut," Journal of Industrial Economics, Wiley Blackwell, vol. 51(4), pages 469-490, December.
    5. Ebenezer Tetteh, 2009. "Implementing differential pricing for essential medicines via country-specific bilateral negotiated discounts," Applied Health Economics and Health Policy, Springer, vol. 7(2), pages 71-89, June.
    6. Joan Ramon Borrell Arque, 2001. "Drug price differentials caused by de-listing and price cap policies," Working Papers in Economics 70, Universitat de Barcelona. Espai de Recerca en Economia.
    7. Donald Vandegrift & Anusua Datta, 2006. "Prescription Drug Expenditures in the United States: The Effects of Obesity, Demographics, and New Pharmaceutical Products," Southern Economic Journal, John Wiley & Sons, vol. 73(2), pages 515-529, October.

    More about this item

    Keywords

    Pharmaceutical industry; Price discrimination; Prescription drug pricing; Managed care; JEL classifications: D40; L40; L65;
    All these keywords.

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
    • L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology; Plastics

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