The Effect of Bargaining Power Determinants on Pharmaceutical Prices

50 Pages Posted: 20 Dec 2019

See all articles by Sebastian Linde

Sebastian Linde

Purdue University - Department of Economics

Brandon Norton

Purdue University - Department of Economics

Ralph Siebert

Purdue University; CESifo

Date Written: 2019

Abstract

This paper provides insights into the determinants of bargaining power and how they affect drug prices. Our data show that drug prices vary across buyers and time periods. We estimate a structural bargaining model where drug suppliers and buyers engage in bilateral bargaining over drug prices. Our estimation results show that drug buyers hold, on average, 55% of the bargaining power. We also find that bargaining power can imply a range of drug prices. Differences in bargaining power explains large price heterogeneities across buyers, drug classes, and time periods. Additionally, of the drug price variation that is explained by bargaining power, differences across buyers rather than changes over time are more important. We examine buyer and seller characteristics that determine bargaining power and evaluate how changes in these bargaining power determinants affect bargaining power and prices. We find that transaction-specific determinants (such as transaction volume) and business relationships between buyers and sellers (such as buyer's loyalty and multiple drug purchases from the same seller) exert the strongest effects on improving buyer bargaining power and reducing drug prices. For example, an 10% increase in transaction volume, buyer's loyalty, and multiple drug purchases strengthens buyer's bargaining power and results in a drug price reduction of 12%.

Keywords: bargaining power, determinants of bargaining power, drug prices, drug price variation, business relationship between buyers and sellers

JEL Classification: L100

Suggested Citation

Linde, Sebastian and Norton, Brandon and Siebert, Ralph, The Effect of Bargaining Power Determinants on Pharmaceutical Prices (2019). CESifo Working Paper No. 7988, Available at SSRN: https://ssrn.com/abstract=3507259 or http://dx.doi.org/10.2139/ssrn.3507259

Sebastian Linde (Contact Author)

Purdue University - Department of Economics ( email )

West Lafayette, IN 47907-1310
United States

Brandon Norton

Purdue University - Department of Economics ( email )

West Lafayette, IN 47907-1310
United States

Ralph Siebert

Purdue University ( email )

610 Purdue Mall
West Lafayette, IN 47907
United States

CESifo ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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