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The Strategic Response by Pharmaceutical Firms to the Medicaid Most-Favored-Customer Rules

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Author Info
Fiona M. Scott Morton () (School of Management)
Abstract

In 1991 a most-favored-customer (MFC) rule was adopted to govern pharmaceutical prices paid by Medicaid. Theoretical models show that an MFC rule commits a firm to compete less aggressively in prices. I find that the price of branded products facing generic competition rose (4% on average). Brands protected by patents did not significantly increase in price. Generics in concentrated markets should display a strategic response to the brand's adoption of the MFC; I find that generic firms raise price more as their markets become concentrated. Hospital prices show little change. The results suggest that the MFC rule caused higher prices for some pharmaceutical customers.

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Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm58.

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Date of creation: 25 Jun 1997
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Handle: RePEc:ysm:somwrk:ysm58

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Find related papers by JEL classification:
L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology
L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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  1. Jonathan Gruber, 2000. "Medicaid," NBER Working Papers 7829, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
    • Jonathan Gruber, 2003. "Medicaid," NBER Chapters, in: Means-Tested Transfer Programs in the United States, pages 15-78 National Bureau of Economic Research, Inc. [Downloadable!]
  2. Kathryn Spier, 2001. "The Use of "Most-Favored-Nation" Clauses in Settlement of Litigation," Berkeley Olin Program in Law & Economics, Working Paper Series 1024, Berkeley Olin Program in Law & Economics. [Downloadable!]
  3. Martin Gaynor & William B. Vogt, 1999. "Antitrust and Competition in Health Care Markets," NBER Working Papers 7112, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Margaret K. Kyle, 2007. "Strategic Responses to Parallel Trade," NBER Working Papers 12968, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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This page was last updated on 2009-12-2.

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