Squeezing the last drop out of your suppliers

An empirical study of market-based purchasing policies for generic pharmaceuticals

CHEP/CORS SEMINAR by David Granlund (Umeå University)
Joint with: Mats A. Bergman and Niklas Rudholm
We study the effect of the degree of exclusivity for the lowest bidder on the average price of generic pharmaceuticals in the short and long terms. Our results indicate that a 1-percentage-point gain in market share of the lowest bidder reduces average costs by 0.3% in the short term and 0.8% in the long term, but also reduces the number of firms by 1%. We find that reducing the number of firms has a strong positive (and hence counteracting) effect on average prices, i.e., a 1% reduction raises prices by approximately 1%.