Distributing Products Under the Nonprofit Institutions Act: Pricc Discrimination, Arbitrage, and Fraud in the Pharmaceutical Industry

I. INTRODUCTION In 1936, the Robinson-Patman Actl was enacted as an amendment to section 2 of the Clayton Act.2 Subject to technical requirements and defined defenses, these enactments prohibit primary-3 and secondary-line price discrimination4 practices by which a seller charges different prices to different buyers for the same commodity.5 IMAGE FORMULA7 The Robinson-Patman Act, which added the prohibition of secondary-line price discrimination to protect price-disfavored purchasers of a discriminating seller,6 was meant to counter the perceived market power of large retail chains that enabled those chains to extract price favors from suppliers! Those without market power, the small retailers, were at a disadvantage because they paid higher prices for the commodities that they resold in competition with the larger chains.8 These concerns resonated well with the then-prevailing antitrust policy, which had a populist bias aimed at preserving "small IMAGE FORMULA9dealers and worthy men"9 as well as the deconcentrated industries in which they can survive.10 Today, antitrust commentators question the prohibition of price discrimination,ll largely because antitrust policy has shifted toward the goal of consumer welfare and the concomitant goal of encouraging suppliers to maximize output.12 Economic theory teaches that IMAGE FORMULA11 where a supplier can successfully price discriminate by charging different prices to groups of consumers with different demand characteristics, the supplier can expand beyond the profit-maximizing output associated with a single price."3 Indeed, in the modern context of utility regulation, economic analysis, supported by a history of successful results, has shown that, by charging different prices to groups of purchasers with different demand characteristics, suppliers can provide more services to more consumers.TM Nonetheless, an important and historically consistent theme of the antitrust laws, of which IMAGE FORMULA13 the Robinson-Patman Act is a part, is to curb the abuse of market power. In the context of utility regulation, price regulation prevents the abuse of market power by suppliers. What is perhaps less appreciated is that, when the RobinsonPatman Act was enacted, there were concerns that the prohibition of price discrimination might reach too far.ls At that time, the government was able to secure price favors from suppliers who actively sought potentially large and lucrative government contracts.lb As it continues to do today, the government provided goods and services, such as education and health care, to consumers who otherwise might not be able to obtain those goods and services from private industry." Suppliers who granted price favors to the government but charged higher prices to private industry might be seen as putting private industry at a disadvantage when selling goods and services also provided by the government." Consequently, some feared that the Robinson-Patman Act would force the government to pay higher prices to its suppliers, all to the detriment of the public policy goals that government pursues.19 A second concern, voiced on behalf of eleemosynary institutions, IMAGE FORMULA15was that the Robinson-Patman Act would prevent suppliers from granting price favors to those institutions." This concern mirrored the one directed at preserving price favors for the government. El-- eemosynary institutions provide goods and services, such as education and health care, to consumers who otherwise might not be able to obtain those goods and services from private industry. Suppliers who granted price favors to eleemosynary institutions but charged higher prices to private industry might be seen as putting private industry at a disadvantage when selling goods and services also provided by eleemosynary institutions. …