Wednesday, January 2, 2013
Posted by D. Daniel Sokol
Gerg Werden (DOJ) explains THE ECONOMICS OF FTC V. LUNDBECK: WHY DRUG MERGERS MAY NOT RAISE PRICES.
ABSTRACT: In Federal Trade Commission v. Lundbeck, the courts rejected a challenge to a consummated acquisition that had placed under common control the only two drugs for treating a serious heart condition in newborns. Clinical studies showed that the two drugs were equally effective, and the only alternative, surgery, was not a good substitute. Moreover, prices shot up immediately after the acquisition. Yet the courts ruled that the FTC failed to demonstrate substitutability in response to a price difference between the drugs. This article explains why the much-criticized result and rationale of the case plausibly were correct. Analysis of a bespoke model of competition between therapeutic substitute drugs reveals that: (1) competition plausibly results in monopoly pricing, and if not, (2) competition plausibly results in near-monopoly pricing.