Competition in the Pharmaceutical Markets: Firm, Market Size and Social Welfare Effects

Does price competition between firms always benefit consumers? Standard economic theory implies that reductions in prices are welfare increasing due to increases in consumer surplus.  In contrast to the standard model we identify a situation in the health care market in which price competition between firms that produce two nearly identical products leads to physician induced demand, an increase in the size of the market (new consumers) for the good and potential negative welfare effects for consumers. In this market physicians capture nearly all of the benefits from firm competition on the prices of the drugs.

The pharmaceutical firm, Amgen, is a producer of Aranesp, a red blood cell growth factor (RBCGF) and Neulasta and Neupogen, two white blood cell growth factors (WBCGF). All of these drugs are used in the treatment of cancer patients receiving chemotherapy and Amgen enjoys monopoly power in the WBCGF market, as Neulasta and Neupogen compose nearly all of WBCGF sales.  Amgen faces competition in the RBCGF market from Procrit, a nearly identical product produced by Johnson and Johnson. In the spring of 2004, Amgen introduced several new contracts that bundled the prices of Aranesp and Neulasta/Neupogen and structured the contracts in such a way that physicians would receive larger discounts on RBCGF and WBCGF products if they increased the share of Amgen’s RBCGF or WBCGF products in the clinic’s overall RBCGF and WBCGF purchases.

Physicians’ profits in the RBCGF and WBCGF product markets are determined by the difference between the price that physicians receive from Amgen and J&J (or other intermediaries) and the Medicare reimbursement price for these products. Consequently, the new contracts incentivized physicians to utilize more of both Neulasta and Aranesp.  Using national level sales data on Aranesp and Neulasta and National Medicare data on lung cancer patients over the 2002-2005 time period, we show that consistent with theory, the bundling contracts introduced by Amgen on March 1, 2004 immediately increased the demand for Aranesp and Neulasta. The increase in Aranesp was partially offset by a reduction in the use of Procrit, but this substitution was not one to one with respect to the number of RBCGF treated Medicare lung cancer patients. Together these empirical results imply that price competition between Amgen and J&J not only changed the market shares of the two products in the RBCGF product market, but also increased the overall size of the market (number of consumers) of the bundled products. In this particular case and the broader health care markets the costs and benefits of these latter effects to consumers will likely vary depending on the products under study and the resulting health effects from utilizing the bundled products on the new patients.