Fiona M. Scott Morton

Barriers to entry, brand advertising, and generic entry in the US pharmaceutical industry

Abstract This paper examines the entry decisions of generic pharmaceutical manufacturers into markets opened by patent expiration. In particular, I examine the role of pre-expiration brand advertising to see if it deters generic entry. Other drug characteristics affect the number of entrants; the most important of these is pre-expiration brand revenue. Drugs that treat chronic conditions and drugs that are oral solids attract more entry. The previous literature has assumed advertising is exogenous to the entry decision when analyzing the role of advertising. The results under this hypothesis indicate that brands may affect generic entry very slightly by advertising before patent expiration, but two opposing effects render the result nearly insignificant. When instrumented, the coefficient on advertising is completely insignificant. I conclude that brand advertising is not a barrier to entry by generic firms into the US pharmaceutical market.

Hospitals, Market Share, and Consolidation

A large reduction in use of inpatient care combined with the incentives in the Affordable Care Act is leading to significant consolidation in the hospital industry. What was once a set of independent hospitals having arms-length relationships with physicians and clinicians who provide ambulatory care is becoming a small number of locally integrated health systems, generally built around large, prestigious academic medical centers. The typical region in the United States has 3 to 5 consolidated health systems, spanning a wide range of care settings, and a smaller fringe of health care centers outside those systems. Consolidated health systems have advantages and drawbacks. The advantages include the ability to coordinate care across different practitioners and sites of care. Offsetting this is the potential for higher prices resulting from greater market power. Market power increases because it is difficult for insurers to bargain successfully with one of only a few health systems. Antitrust authorities are examining these consolidated systems as they form, but broad conclusions are difficult to draw because typically the creation of a system will generate both benefit and harm and each set of facts will be different. Moreover, the remedies traditionally used (eg, blocking the transaction or requiring that the parties divest assets) by antitrust authorities in cases of net harm are limited. For this reason, local governments may want to introduce new policies that help ensure consumers gain protection in the event of consolidation, such as insurance products that charge consumers more for high-priced clinicians and health care centers, bundling payments to clinicians and health care organizations to eliminate the incentives of big institutions to simply provide more care, and establishing area-specific price or spending targets.

The Strategic Response by Pharmaceutical Firms to the Medicaid Most-Favored-Customer Rules

In 1990 the Federal Government included a Most Favored Customer (MFC) clause in the contract (OBRA 90) which would govern the prices paid to firms for pharmaceutical products supplied to Medicaid recipients. The firms had to give Medicaid their best (lowest) price in some cases, a percentage below average price in others. Many theoretical models have shown that an MFC rule commits a firm to compete less aggressively in prices. We might expect prices to rise following the implementation of the MFC rule, yet the work done to date on OBRA 90 has found this result somewhat difficult to show empirically. I also conclude that the effects of the law are small and relatively weak; however, the results are strongest where the products characteristics match the incentives in the law. I find that after the MFC rule was implemented the average price of branded products facing generic competition rose - the median presentations price rose about 4%. Brands protected by patents did not significantly increase price. Generics in concentrated markets should display a strategic response to the brands adoption of the MFC. I find support for the strategic effect; generic firms raise their prices more as their markets become more concentrated. I find little change in hospital prices. The results suggest that the MFC rule resulted in higher prices to some non-Medicaid consumers of pharmaceuticals.

Social Status, Entry and Predation: The Case of British Shipping Cartels 1879–1929

The authors incorporate social status and regional affiliation--two variables of central sociological interest--into an economic analysis of entry and predation. They build on Scott Mortons (1997) examination of entry and predation in the merchant shipping industry and examine whether the social status of an entrant owner impacts on the predation behavior of the incumbent cartels. The authors find that high social status entrants are significantly less likely (40 percent) to be preyed upon than the low social status entrants. They discuss several interpretations of this result. Subsequent analysis supports the hypothesis that cartel members use social status as an indicator of an entrants propensity to be a cooperative cartel participant. Copyright 1999 by Blackwell Publishing Ltd

Behavioral Biases Meet the Market: The Case of Magazine Subscription Prices

Abstract Using data from American magazines, we explore the relationship between newsstand and subscription prices and magazine characteristics. In particular, we distinguish between magazines that provide benefits in the future (investment magazines) versus those that are simply fun to read now (leisure magazines). A consumer with a present bias at the newsstand discounts the future payoff of the investment good but fully values the leisure good. This difference does not exist for subscriptions. Thus, the ratio of the subscription to newsstand willingness to pay for a magazine should differ between investment and leisure goods. We find that for magazines whose payoff is in the future, subscriptions are relatively more costly, ceteris paribus. This finding suggests that publishers reflect the present bias preferences of consumers in their price setting behavior.

The Strategic Positioning of Store Brands in Retailer - Manufacturer Bargaining

We argue in this paper that retailers can strategically position store brands in product space to strengthen their bargaining position when negotiating supply terms with manufacturers of national brands. Using a bargaining framework we model a retailers decision whether to carry an additional national brand or a store brand, and if the retailer chooses to introduce the latter, where in product space to locate the store brand. Store brands differ from other brands in being both unadvertised and located at a position in product space that is determined by the retailer instead of by a manufacturer. To capture the negotiation effect of store brands empirically, our paper analyzes a retailers choice of whether or not to carry a store brand in a given category. We control for other motivations for carrying a store brand that have been used in the literature. We test our model on a cross-section of categories using supermarket data from multiple retailers. The first contribution of this paper is to show theoretically that the strategic positioning of a store brand in a category changes the bargaining over supply terms between a retailer and national brand manufacturers in that category. The empirical evidence is consistent with the theory. We find that retailers are more likely to carry a store brand in a category if the share of the leading national brand is higher, but that the leading national brand share does not affect the market share of the store brand. This indicates that there may be a bargaining motive for the introduction of the store brand. We propose that this is because the retailer can position the store brand to mimic the leading national brand and present data that shows that store brands frequently imitate national brand packaging on multiple dimensions.

The Impact of Consumer Inattention on Insurer Pricing in the Medicare Part D Program

Medicare Part D presents a novel privatized structure for a government pharmaceutical benefit. Incentives for firms to provide low prices and high quality are generated by consumers who choose among multiple insurance plans in each market. To date the literature has primarily focused on consumers, and has calculated how much could be saved if they chose better plans. In this paper we take the next analytical step and consider how plans will adjust prices as consumer search behavior improves. We use detailed data on enrollees in New Jersey to demonstrate that consumers switch plans infrequently and imperfectly. We estimate a model of consumer plan choice with inattentive consumers. We then turn to the supply side and examine insurer responses to this behavior. We show that high premiums are consistent with insurers profiting from consumer inertia. We use the demand model and a model of firm pricing to calculate how much lower Part D program costs would be if consumer inattention were removed and plans re-priced in response. Our estimates indicate that consumers would save

Markets for Pharmaceutical Products

601 each over three years when firms’ choice of markup is taken into account. Cost growth would also fall: by the last year of our sample government savings would amount to

Strategic Patent Acquisitions

224 million per year or 4.1% of the cost of subsidizing the relevant enrollees.

Data Impediments to Empirical Work on Health Insurance Markets

This chapter describes the market for pharmaceuticals, which exceeded