Countervailing Power in Wholesale Pharmaceuticals

40 Pages Posted: 25 Jul 2001

See all articles by Sara Fisher Ellison

Sara Fisher Ellison

Massachusetts Institute of Technology (MIT) - Department of Economics

Christopher M. Snyder

Dartmouth College - Department of Economics

Date Written: July 2001

Abstract

There are a number of theories in the industrial organization literature explaining the conventional wisdom that larger buyers may have more "countervailing power" than small buyers, in that they receive lower prices from suppliers. We test the theories empirically using data on wholesale prices for antibiotics sold through various distribution channels-chain and independent drugstores, hospitals, HMOs-in the U.S. during the 1990s. Price discounts depend more on the ability to substitute among alternative suppliers than on sheer buyer size. In particular, hospitals and HMOs, which can use restrictive formularies to enhance their substitution opportunities beyond those available for drugstores, obtain substantially lower prices. Chain drugstores only receive a small size discount relative to independents, at most two percent on average, and then only for products for which drugstores have some substitution opportunities (i.e., not for on-patent branded drugs). Our findings are roughly consistent with collusion models of countervailing power and inconsistent with bargaining models and have implications for recent government proposals to form purchasing alliances to reduce prescription costs.

JEL Classification: L43, L65, D43, C78

Suggested Citation

Fisher Ellison, Sara and Snyder, Christopher M., Countervailing Power in Wholesale Pharmaceuticals (July 2001). MIT Dept. of Economics Working Paper No. 01-27. Available at SSRN: https://ssrn.com/abstract=277290 or http://dx.doi.org/10.2139/ssrn.277290

Sara Fisher Ellison (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

50 Memorial Drive
Room E52-262C
Cambridge, MA 02142
United States
617-253-3821 (Phone)
617-253-1330 (Fax)

Christopher M. Snyder

Dartmouth College - Department of Economics ( email )

301 Rockefeller Hall
Hanover, NH 03755
United States
(603) 646-0642 (Phone)
(603) 646-2122 (Fax)

HOME PAGE: http://www.dartmouth.edu/~csnyder/

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