Countervailing power in wholesale pharmaceuticals

Using data on wholesale prices for antibiotics sold to U.S. drugstores, we test the growing theoretical literature on 'countervailing power' (a term for the ability of large buyers to extract discounts from suppliers). Large drugstores receive a modest discount for antibiotics produced by...

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Bibliographic Details
Published in:The Journal of industrial economics 2010-03, Vol.LVIII (1), p.32-53
Main Authors: Ellison, Sara Fisher, Snyder, Christopher M
Format: Article
Language:English
Subjects:
Hospitals
Market share
Pharmaceuticals
Price formation
Retail trade
U.S.A
Wholesale prices
Wholesale trade
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Summary:Using data on wholesale prices for antibiotics sold to U.S. drugstores, we test the growing theoretical literature on 'countervailing power' (a term for the ability of large buyers to extract discounts from suppliers). Large drugstores receive a modest discount for antibiotics produced by competing suppliers but no discount for antibiotics produced by monopolists. These findings support theories suggesting that supplier competition is a prerequisite for countervailing power. As further evidence for the importance of supplier competition, we find that hospitals receive substantial discounts relative to drugstores, attributed to hospitals' greater ability to induce supplier competition through restrictive formularies. Reprinted by permission of Blackwell Publishers
ISSN:0022-1821