Tuesday, August 13, 2013

Pharmacy Pricing Dilemma

The Wall Street Journal has an interesting article about small pharmacy's asking the government to force pharmacy benefit managers to reveal their pricing (reimbursement) for pharmaceutical drugs.  Here's the basics:  you have large pharmaceutical manufacturers (Eli Lilly) who primarily sell their products to pharmacy benefit managers (Express Scripts) who then re-sell these pharmaceutical drugs to either small pharmacy's or to individual customers.  This is an example of a vertically related industry.

What the small pharmacy's want is the price that the pharmacy benefit managers will charge for selling the pharmaceutical drug, and are asking the government to force the pharmacy benefit managers to provide this information.

In class, I go over the vertically separated and vertically integrated industry under both monopoly and oligopoly.  In each case, I assume that the downstream firm (here would be the small pharmacy) knows the price that the upstream firm (the pharmacy benefit manager) is charging them in order for the downstream firm to maximize their profits.  If that is not the case, as indicated by the small pharmacies, then they are at a strategic disadvantage in determining their optimal price and quantity decisions.

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