Multimarket Contact in Pharmaceutical Markets
Multimarket rivalry theory predicts that firms engaged in price competition in several markets might find it optimal to redistribute market power from more collusive markets to more competitive instances. Price regulation is shown to affect this relation in a non-monotonic way. Mild or low price regulation may encourage further market power redistribution, whereas stronger price controls change the result to the point of making it irrelevant. We use data from the Pharmaceutical industry for nine OECD countries which are known to place different levels of price controls. We find evidence of the redistribution effect and the interaction with price regulations when considering contacts between chemically equivalent products; however, widening the contact dimension to consider interactions among substitute therapies make the result less transparent. We also find some evidence of the expected interaction between price controls and the redistribution effect driven by the multi-market structure of the industry.
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