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Using data on wholesale prices for antibiotics sold to U.S. drugstores, we test the growing theoretical literature on 'countervailing power' (a term for the ability of large buyers to extract discounts from suppliers). Large drugstores receive a modest discount for antibiotics produced by competing suppliers but no discount for antibiotics produced by monopolists. These findings support theories suggesting that supplier competition is a prerequisite for countervailing power. As further evidence for the importance of supplier competition, we find that hospitals receive substantial discounts relative to drugstores, attributed to hospitals' greater ability to induce supplier competition through restrictive formularies. Copyright 2010 The Authors. Journal compilation 2010 Blackwell Publishing Ltd. and the Editorial Board of The Journal of Industrial Economics.

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  • Sara Fisher Ellison & Christopher M. Snyder, 2010. "COUNTERVAILING POWER IN WHOLESALE PHARMACEUTICALS -super-," Journal of Industrial Economics, Wiley Blackwell, vol. 58(1), pages 32-53, March.
  • Handle: RePEc:bla:jindec:v:58:y:2010:i:1:p:32-53

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    References listed on IDEAS

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    Cited by:

    1. Aidan Hollis & Stephen Law, 2004. "A National Formulary for Canada," Canadian Public Policy, University of Toronto Press, vol. 30(4), pages 445-452, December.
    2. Liu, Ya-Ming & Cheng, Jur-Shan, 2012. "Determinants of generic entry in the regulated Taiwanese prescription drug market," Health Policy, Elsevier, vol. 108(2), pages 228-235.
    3. Antelo, Manel & Bru, Lluís, 2015. "Buyer groups, preferential treatment through key account management, and cartel stability," MPRA Paper 79197, University Library of Munich, Germany, revised 11 Dec 2016.
    4. Bradley J. Ruffle, 2013. "When Do Large Buyers Pay Less? Experimental Evidence," Journal of Industrial Economics, Wiley Blackwell, vol. 61(1), pages 108-137, March.
    5. Inderst, Roman & Wey, Christian, 2007. "Buyer power and supplier incentives," European Economic Review, Elsevier, vol. 51(3), pages 647-667, April.
    6. Jim Engle-Warnick & Bradley Ruffle, 2002. "Buyer Countervailing Power versus Monopoly Power: Evidence from Experimental Posted-Offer Markets," Economics Papers 2002-W14, Economics Group, Nuffield College, University of Oxford.
    7. Hans-Theo Normann & Bradley J. Ruffle & Christopher M. Snyder, 2007. "Do buyer-size discounts depend on the curvature of the surplus function? Experimental tests of bargaining models," RAND Journal of Economics, RAND Corporation, vol. 38(3), pages 747-767, September.
    8. Glenn Ellison & Sara Fisher Ellison, 2011. "Strategic Entry Deterrence and the Behavior of Pharmaceutical Incumbents Prior to Patent Expiration," American Economic Journal: Microeconomics, American Economic Association, vol. 3(1), pages 1-36, February.
    9. Battigalli, Pierpaolo & Fumagalli, Chiara & Polo, Michele, 2007. "Buyer power and quality improvements," Research in Economics, Elsevier, vol. 61(2), pages 45-61, June.
    10. Liu, Ya-Ming & Kao Yang, Yea-Huei & Hsieh, Chee-Ruey, 2011. "The determinants of the adoption of pharmaceutical innovation: Evidence from Taiwan," Social Science & Medicine, Elsevier, vol. 72(6), pages 919-927, March.
    11. Kai Hüschelrath & Tobias Veith, 2016. "Cartelization, Cartel Breakdown, and Price Behavior: Evidence from the German Cement Industry," Journal of Industry, Competition and Trade, Springer, vol. 16(1), pages 81-100, March.
    12. Baldursson, Fridrik M. & Johannesson, Sigurdur, 2005. "Kaupendamáttur á sementsmarkaði
      [Buyer power in the cement industry]
      ," MPRA Paper 14742, University Library of Munich, Germany.
    13. Suchan Chae & Paul Heidhues, 2004. "Buyers' Alliances for Bargaining Power," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 13(4), pages 731-754, December.
    14. Chiara Fumagalli & Massimo Motta, 2008. "Buyers' Miscoordination, Entry and Downstream Competition," Economic Journal, Royal Economic Society, vol. 118(531), pages 1196-1222, August.
    15. Pio Baake & Andreas Harasser, 2017. "Upstream Monopoly and Downstream Information Sharing," Discussion Papers of DIW Berlin 1635, DIW Berlin, German Institute for Economic Research.
    16. Graf, Julia, 2012. "The effects of rebate contracts on the health care system," DICE Discussion Papers 45, University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    17. Smith, Howard & Thanassoulis, John, 2006. "Upstream Competition and Downstream Buyer Power," CEPR Discussion Papers 5803, C.E.P.R. Discussion Papers.
    18. Hamilton, Jonathan H., 2012. "The effect of Canadian imports on prescription drug prices in the U.S," Regional Science and Urban Economics, Elsevier, vol. 42(6), pages 1003-1008.
    19. Ramon Fauli-Oller & Borja Mesa-Sánchez, 2015. "Losses from Horizontal Merger: an Extension to a Successive Oligopoly Model with Product Differentiation," Manchester School, University of Manchester, vol. 83(5), pages 604-621, September.
    20. Ernst R. Berndt, 2002. "Pharmaceuticals in U.S. Health Care: Determinants of Quantity and Price," Journal of Economic Perspectives, American Economic Association, vol. 16(4), pages 45-66, Fall.
    21. Heimeshoff, Ulrich & Klein, Gordon J., 2013. "Bargaining power and local heroes," DICE Discussion Papers 87, University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    22. Smith, Howard & Thanassoulis, John, 2012. "Upstream uncertainty and countervailing power," International Journal of Industrial Organization, Elsevier, vol. 30(6), pages 483-495.
    23. repec:wsi:qjfxxx:v:07:y:2017:i:04:n:s2010139217500148 is not listed on IDEAS
    24. Liu, Ya-Ming & Yang, Yea-Huei Kao & Hsieh, Chee-Ruey, 2012. "Regulation and competition in the Taiwanese pharmaceutical market under national health insurance," Journal of Health Economics, Elsevier, vol. 31(3), pages 471-483.
    25. Darius Lakdawalla & Wesley Yin, 2009. "Insurer Bargaining and Negotiated Drug Prices in Medicare Part D," NBER Working Papers 15330, National Bureau of Economic Research, Inc.

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