The market for prescription pharmaceuticals has some characteristics that render it very different from other markets in which consumer goods are sold. Supply is characterised by a considerable degree of market power, due to the presence of patents. Consumer demand is rather inelastic, because the one who makes the decision about the purchase (the doctor) is not the one who pays (the consumer or the insurer), and, hence, is less sensitive to price and often less informed about it. Demand by wholesalers and retailers is also rather rigid due to the must-have nature of many drugs, caused by the lack of alternatives for many drugs and by regulatory requirements on the range and level of the products that have to be made available to customers. These features imply that market competition cannot fully be relied upon to reach an efficient allocation of resources and that regulatory interventions to address these market failures are necessary. This paper does not consider the market in its entirety, but focuses just on the distribution part of the market. Hence, this paper will not discuss competition issues related to patents and investments in innovation, nor agreements and mergers between drug producers, but it will concentrate on the wholesale and retail level of the value chain. This paper looks only at prescription pharmaceuticals, since the market for over the counter medicines (OTC) tends to have different characteristics.
COMPETITION ISSUES IN THE DISTRIBUTION OF PHARMACEUTICALS