Cross-Bundling and (Anti) Competitive Behavior: Evidence from the Pharmaceutical Industry

There is a substantial literature in economics on intra-firm product combinations such as bundling and tying. Little is known, however, about the economic implications of inter-firm product combinations. We propose and estimate a model to study pricing strategies and the welfare effects of this practice, focusing on the pharmaceutical industry. We find that firms increase their profits by participating in inter-firm product combinations. A less competitive equilibrium arises in this situation as the firms are able to partially internalize the externality their pricing decisions impose on their competitors. We also find that profit increases from the inter-firm product combinations could be as large as profit increases from mergers. Our results should help policy-makers evaluate the antitrust implications of mergers in the pharmaceutical industry. Department of Policy Analysis and Management, Cornell University, 105 MVR Hall, Ithaca NY 14853. E-mail: [email protected] Department of Policy Analysis and Management, Cornell University, 123 MVR Hall, Ithaca NY 14853. E-mail: [email protected] Simon Graduate School of Business, University of Rochester, Rochester NY 14627. E-mail: [email protected]. We have benefited from discussions with Michael Waldman and comments by seminar participants at the Federal Trade Commission, the 2009 IIOC and the University of Rochester. All errors are ours.