Working Paper: NBER ID: w16321
Authors: Claudio Lucarelli; Sean Nicholson; Minjae Song
Abstract: We empirically analyze the welfare effects of cross-firm bundling in the pharmaceutical industry. Physicians often treat patients with "cocktail" regimens that combine two or more drugs. Firms cannot price discriminate because each drug is produced by a different firm and a physician creates the bundle in her office from the component drugs. We show that a less competitive equilibrium arises with cocktail products because firms can internalize partially the externality their pricing decisions impose on competitors. The incremental profits from creating a bundle are sometimes as large as the incremental profits from a merger of the same two firms.
Keywords: bundling; pharmaceuticals; cocktails; welfare effects
JEL Codes: I11; L11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| cocktail regimens (L66) | less competitive market (L19) |
| internalizing pricing externalities (D62) | less competitive market (L19) |
| cocktail regimens (L66) | increase in profits for firms (D21) |
| cocktail regimens (L66) | decrease in consumer surplus (D11) |
| removing cocktail regimens (L66) | decrease in profits for firms (D21) |
| cocktail regimens (L66) | higher pricing power for firms (L11) |
| bundling (L14) | collusion-like behavior (L12) |
| separate prices for standalone products and cocktail components (D49) | higher prices for cocktail components (L66) |