Tuesday, August 22, 2017

Reduce Prices When you Acquire a Complementary Good

Minjae Song, Sean Nicholson, and Claudio Lucarelli examine the pricing of drug "cocktails" in their new paper in the RAND Journal of Economics. Sometimes the preferred treatment regimen is a combination of drugs made by competing firms. Each drugs might deal with issues not treated by the other, or that are exasperated by the other, and so are complement each other. In these cases, there would be two effects from a merger between firms:

  • higher prices from increased market power when the drugs are sold stand alone and 
  • lower prices from internalizing the complementarity when the drugs are sold in combination. 

In their simulations of hypothetical mergers, Song et al. find that the two effects are practically a wash and often consumers are better off.
The net impact of a merger is a modest price increase, or even a price decrease.

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