Case Assignment: Brand Name Prescription Drugs Economics 33

For class discussion Friday, May 14^th Prof. Stephen Schmidt

Read the case “The Brand Name Prescription Drugs Antitrust Litigation” in Antitrust Revolution (pages 301-320). Provide a typed one or two page answer to the following question (the graphs can be hand-drawn):

Draw the demand curve for prescription drugs by retail pharmacies, and also the demand curve for prescription drugs by managed care organizations. (I will call someone to the board to do this in discussion.) How do these curves justify a higher price for retail pharmacies?

Be prepared to discuss that question and the following questions in class. Also prepare two questions of your own regarding the case to ask in class discussion. Make sure you understand the definitions of “chargebacks”, “rebates”, and “formulary” for discussion. They are all defined early in the case, and parts of the rest of the case is more difficult to understand if you do not make note of what these are (especially the last).

1. Exactly what are pharmaceutical firms being accused of doing? Is it price fixing or something else? Is it a unilateral practice or a multilateral practice? If they are being accused of doing more than one thing, answer the latter two questions for each. What has been settled by litigation thus far, and what remains to be settled?

2. What does the case mean when it says that retail pharmacies do not have the ability to “move market share”? Why does it think that hospitals and managed care organizations do have that ability? What evidence was presented about the ability of pharmacies to do so, and what view of the case did that evidence support?

3. How did the defendants justify charging different prices for identical drugs to different customers? They had more than one justification – which of these justifications seem like acceptable ones to you (either from an economic standpoint or another standpoint) and which are problematic for you? Why do you think so?

4. The current law on price discrimination is Section 2 of the Clayton Act as amended by the Robinson-Patman Act. It is linked on the class website. Read the first paragraph of the law (read the rest too, but the first paragraph is the most important portion). Based on that, plus the information in this case, do you think the defendants will win or lose when (if) the price discrimination charges are heard? What evidence makes you think so?

5. What is the difference between the efficiency philosophy of antitrust and the populist philosophy of antitrust? Pick one other case we have read and explain what the populist philosophy of antitrust would think of that case, and why it would think so.