62 Pages Posted: 11 Aug 2011 Last revised: 1 Oct 2011
Date Written: August 11, 2011
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. 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. Analysis of contractual terms imposed by incumbent vaccine manufacturers implies 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 indicates that incumbents’ bundled discounts successfully leverage market power from the tying market to the tied market, and observed rival penetration rates indicate that incumbent manufacturers have induced significant foreclosure of rivals. Finally, we analyze the role of Physician Buying Groups (PBGs) in the U.S. pediatric vaccine market, demonstrating that PBGs’ compensation structure distorts their incentives to secure the best prices for healthcare providers.
Keywords: Bundling, Discount Attribution Test, Cascade, Consumer Welfare
Suggested Citation: Suggested Citation
Caves, Kevin W. and Singer, Hal J., Bundles in the Pharmaceutical Industry: A Case Study of Pediatric Vaccines (August 11, 2011). Available at SSRN: https://ssrn.com/abstract=1908306 or http://dx.doi.org/10.2139/ssrn.1908306