The Distribution and Pricing of Prescription Drugs

Abstract

Scherer (Scherer, F.M., "How US Antitrust Can Go Astray: The Brand Name Prescription Drug Litigation", International Journal of the Economics of Business, 1997, 4, 3, 000-000) uses the conventional economic model of third-degree price discrimination to analyze the pharmaceutical industry's practice of selling prescription drugs at discounted prices to hospitals and managed care entities. In this framework, prescription drug discounts appear to make some consumers (those in the managed care sector) better off and other consumers (those outside the managed care sector) worse off. While illuminating, this analysis neglects two important aspects of pharmaceutical pricing. First, it neglects the active role hospitals and managed care organizations play in making the demand for drugs more elastic. Second, the sellers of prescription drugs, as a rule, are oligopolists, not monopolists as the price discrimination model assumes. In this paper, we incorporate these two characteristics of pharmaceutical markets in an analysis of prescription drug pricing and conclude that discounts increase consumer welfare in the managed care sector but do not reduce consumer welfare in the traditional retail pharmacy sector