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Bundling Among Rivals: A Case of Pharmaceutical Cocktails

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  • Claudio Lucarelli
  • Sean Nicholson
  • Minjae Song

Abstract

We empirically analyze the welfare effects of cross-firm bundling in the pharmaceutical industry. Physicians often treat patients with "cocktail" regimens that combine two or more drugs. Firms cannot price discriminate because each drug is produced by a different firm and a physician creates the bundle in her office from the component drugs. We show that a less competitive equilibrium arises with cocktail products because firms can internalize partially the externality their pricing decisions impose on competitors. The incremental profits from creating a bundle are sometimes as large as the incremental profits from a merger of the same two firms.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16321.

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Date of creation: Aug 2010
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Handle: RePEc:nbr:nberwo:16321

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  1. Mark Duggan & Fiona Scott Morton, 2004. "The Distortionary Effects of Government Procurement: Evidence from Medicaid Prescription Drug Purchasing," NBER Working Papers 10930, National Bureau of Economic Research, Inc.
  2. Dennis W. Carlton & Michael Waldman, 1998. "The Strategic Use Of Tying To Preserve And Create Market Power In Evolving Industries," University of Chicago - George G. Stigler Center for Study of Economy and State 145, Chicago - Center for Study of Economy and State.
  3. Wesley Yin & Darius Lakdawalla, 2011. "Insurers’ Negotiating Leverage and the External Effects of Medicare Part D," Boston University - Department of Economics - Working Papers Series WP2011-065, Boston University - Department of Economics.
  4. Chen, Yongmin, 1997. "Equilibrium Product Bundling," The Journal of Business, University of Chicago Press, vol. 70(1), pages 85-103, January.
  5. Claudio Lucarelli & Sean Nicholson, 2009. "A Quality-Adjusted Price Index for Colorectal Cancer Drugs," NBER Working Papers 15174, National Bureau of Economic Research, Inc.
  6. Aviv Nevo, 2000. "Mergers with Differentiated Products: The Case of the Ready-to-Eat Cereal Industry," RAND Journal of Economics, The RAND Corporation, vol. 31(3), pages 395-421, Autumn.
  7. Minjae Song, 2007. "Measuring consumerwelfareinthe CPU market: anapplication of the pure-characteristics demand model," RAND Journal of Economics, RAND Corporation, vol. 38(2), pages 429-446, 06.
  8. Dennis W. Carlton & Joshua S. Gans & Michael Waldman, 2007. "Why Tie A Product Consumers Do Not Use?," NBER Working Papers 13339, National Bureau of Economic Research, Inc.
  9. Margaret E. Blume-Kohout & Neeraj Sood, 2008. "The Impact of Medicare Part D on Pharmaceutical R&D," NBER Working Papers 13857, National Bureau of Economic Research, Inc.
  10. Jonathan D. Ketcham & Kosali Simon, 2008. "Medicare Part D's Effects on Elderly Drug Costs and Utilization," NBER Working Papers 14326, National Bureau of Economic Research, Inc.
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Cited by:
  1. Mark Armstrong, 2012. "A More General Theory of Commodity Bundling," Economics Series Working Papers 624, University of Oxford, Department of Economics.
  2. Armstrong, Mark, 2010. "Bundling revisited: substitute products and inter-firm discounts," MPRA Paper 26782, University Library of Munich, Germany.

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