Essays on the industrial organization of pharmaceutical markets

This thesis focuses on the industrial organization of pharmaceutical markets. I study both competitive strategies such as bundling and nonlinear pricing, as well as government intervention through a centralized competitive bidding program. I am interested in pharmaceutical industries for two reasons. First, understanding demand and supply in pharmaceutical markets could provide valuable lessons for healthcare policy. Second, with hundreds of quasi-independent therapeutic markets featuring different market structures, pharmaceutical industries provide a rich laboratory to study classic economic questions related to consumer demand and competitive strategies. In the first chapter, which is joint with Chirantan Chatterjee from University of Sussex, I study the equilibrium effects of competitive bundling on market outcomes and social welfare in the context of the Indian pharmaceutical industry. Fixed-dose combinations (FDCs), which bundle two or more drugs in a single pill, account for over 50% of pharmaceutical revenue in India. Using an equilibrium model of drug demand and supply, we show that the price and welfare effects of FDCs are theoretically ambiguous. Empirically, we find that FDCs on average sell at a 28% discount but increase standalone component prices by 3%. New FDCs significantly increase sales of drug bundles. To quantify the welfare effects of FDCs, we estimate the model in the market for Alzheimer's drugs. We find that FDCs increase consumer surplus by 21% and firm profits by 13\% because of significant market expansion and cost savings. Counterfactual analysis shows that applying FDC regulations from the US to India could deter FDC entry and forestall potential welfare benefits. In the second chapter, which is joint with Xuejie Yi and Chuan Yu from Stanford University, I study the impact of competitive bidding in the procurement of off-patent drugs. In 2019, China introduced competitive bidding with a quantity guarantee for thirty-one molecules in nine provinces. Using a difference-in-difference design, we show that the program reduced average drug prices by 47.4\%. Generic drug firms won the majority of the bids and on average cut prices by 59.4%. We develop a model of demand and supply to quantify the trade-off between lower prices and choice distortions. Competitive bidding increases consumer welfare if policymakers consider brand preferences welfare irrelevant. The program also reduced government expenditures on insurance by 24.3%. In the last chapter, which is joint with Chirantan Chatterjee from the University of Sussex and Pradeep Chintagunta from Chicago Booth, I study non-linear pricing in pharmaceutical markets, focusing on how firms set drug prices at different dosage levels. We document significant variations in pricing strategies across countries, drugs, and firms. For example, drug price usually scales one-to-one with dosage in Spain, but prices are often uniform across dosages in France. We explore underlying mechanisms behind the different pricing strategies, such as variations in production costs, price elasticities, and concerns about pill splitting

Keywords: Economics.
Advisor: Einav Liran
Cuesta Jose Ignacio
Gentzkow Matthew