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Multimarket contact in pharmaceutical markets

We analyze the effect of multimarket contact on the pricing behavior of pharmaceutical firms controlling for different levels of regulatory constraints using the IMS MIDAS database for the industry. Theoretically, under product differentiation, firms may find it profitable to allocate their market power among markets where they are operating, specifically from more collusive to more competitive ones. We present evidence for nine OECD countries suggesting the existence of a multimarket effect for more market friendly countries (U.S. and Canada) and less regulated ones (U.K., Germany, Netherlands), while the results are more unstable for highly regulated countries with some countries being consistent with the theory (France) while others contradicting it (Japan, Italy and Spain). A key result indicates that in the latter countries, price constraints are so intense, that there is little room for allocating market power. Thus equilibrium prices are expected in general to be lower in regulated countries.

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File URL: http://www.econ.upf.edu/docs/papers/downloads/1033.pdf
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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 1033.

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Date of creation: Apr 2007
Date of revision: Jul 2007
Handle: RePEc:upf:upfgen:1033
Contact details of provider: Web page: http://www.econ.upf.edu/

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  1. Scott, John T, 1982. "Multimarket Contact and Economic Performance," The Review of Economics and Statistics, MIT Press, vol. 64(3), pages 368-75, August.
  2. Hackner, Jonas, 1994. "Collusive pricing in markets for vertically differentiated products," International Journal of Industrial Organization, Elsevier, vol. 12(2), pages 155-177, June.
  3. Danzon, Patricia M & Chao, Li-Wei, 2000. "Does Regulation Drive out Competition in Pharmaceutical Markets?," Journal of Law and Economics, University of Chicago Press, vol. 43(2), pages 311-57, October.
  4. Antonio Cabrales, 2003. "Pharmaceutical generics, vertical product differentiation and public policy," Economics Working Papers 662, Department of Economics and Business, Universitat Pompeu Fabra.
  5. Hitoshi Matsushima, 1998. "Multimarket Contact, Imperfect Monitoring, and Implicit Collusion," CIRJE F-Series CIRJE-F-24, CIRJE, Faculty of Economics, University of Tokyo.
  6. Evans, William N & Kessides, Ioannis N, 1994. "Living by the "Golden Rule": Multimarket Contact in the U.S. Airline Industry," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 341-66, May.
  7. Patricia M. Danzon & Andrew J. Epstein, 2008. "Effects of Regulation on Drug Launch and Pricing in Interdependent Markets," NBER Working Papers 14041, National Bureau of Economic Research, Inc.
  8. B. Douglas Bernheim & Michael D. Whinston, 1990. "Multimarket Contact and Collusive Behavior," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 1-26, Spring.
  9. Chang, Myong-Hun, 1991. "The effects of product differentiation on collusive pricing," International Journal of Industrial Organization, Elsevier, vol. 9(3), pages 453-469, September.
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