Bundling Among Rivals: A Case of Pharmaceutical Cocktails

Claudio Lucarelli, Sean Nicholson, Minjae Song

NBER Working Paper No. 16321
Issued in August 2010
NBER Program(s):   HC   IO

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.

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Acknowledgments

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