Bundling Among Rivals: A Case of Pharmaceutical Cocktails

Posted by D. Daniel Sokol

Claudio Lucarelli (Cornell University), Sean Nicholson (Cornell University) and Minjae Song (University of Rochester) have a paper on Bundling Among Rivals: A Case of Pharmaceutical Cocktails.

ABSTRACT: We empirically analyze the welfare effects of cross-firm bundling in the pharmaceutical industry. Physicians often treat patients with "cocktail" regimens that combine two or more drugs. Firms cannot price discriminate because each drug is produced by a different firm and a physician creates the bundle in her office from the component drugs. We show that a less competitive equilibrium arises with cocktail products because firms can internalize partially the externality their pricing decisions impose on competitors. The incremental profits from creating a bundle are sometimes as large as the incremental profits from a merger of the same two firms.