Friday, October 14, 2011
Posted by D. Daniel Sokol
Kevin W. Caves, Navigant Economics and Hal J. Singer, Navigant Economics LLC explore Bundles in the Pharmaceutical Industry: A Case Study of Pediatric Vaccines.
ABSTRACT: Bundling by a firm with monopoly power can be shown to reduce consumer welfare in one of two ways. First, by applying the “discount attribution standard,” bundling can be shown to exclude or impair equally efficient rivals in ancillary or “tied” markets for products that would otherwise be supplied competitively. Second, by comparing the penalty price of the monopolized or “tying” product when purchased separately with its “independent monopoly price,” bundling can be shown to reduce consumer welfare directly. This paper examines both approaches in the sale of pediatric vaccines in the United States, focusing on the market for Meningitis vaccines, which has recently seen new competition from Novartis - the first competitive rival to enter the domestic pediatric vaccine market in over a decade. Analysis of contractual terms imposed by incumbent vaccine manufacturers indicates that single-product entrants attempting to penetrate a vaccine market dominated by multi-product incumbents are placed at a significant competitive disadvantage by incumbents’ bundled-pricing schemes: Existing contractual terms impose sufficiently large non-compliance penalties such that there is no positive price at which a hypothetical rival could induce an otherwise indifferent buyer to “break the bundle.” Furthermore, an analysis of pricing benchmarks derived from cross-sectional data indicates that incumbents’ bundled discounts harm consumers by successfully leveraging market power from the tying market to the tied market. In addition, observed rival penetration rates are consistent with the hypothesis that incumbent manufacturers have induced significant foreclosure of rivals from the relevant market segments, while incumbent foreclosure shares are estimated to significantly exceed the presumptively anticompetitive threshold. Finally, we analyze the role of Physician Buying Groups (PBGs) in the U.S. pediatric vaccine market. Drawing on research on Group Purchasing Organizations in the medical supply industry, we demonstrate that the PBGs’ compensation structure distorts their incentives to secure the best prices for healthcare providers.