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The Interaction between a Most‐Favored‐Customer Clause and Price Dispersion: An Empirical Examination of the Medicaid Rebate Rules of 1990

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  • Fiona M. Scott Morton

Abstract

This paper examines the effect of the MFC rules adopted by Medicaid on both price dispersion and price levels in the wholesale pharmaceutical market. Theory suggests that the regulations should reduce price dispersion and increase the average price for those products with a high initial level of price dispersion. Using data which can only measure some dimensions of price discrimination, I find that discrimination falls for products sold to hospitals, but not drugstores. Branded drugs facing generic competition have the most dispersion ex ante. Prices of these brands rise with dispersion at the implementation of the new rules. The last two results are consistent with Scott Morton (1997), where I look only at price changes due to the law. The results of this paper confirm that part of the mechanism of action for the price increase is the high level of price dispersion for some products combined with the MFC.

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  • Fiona M. Scott Morton, 1997. "The Interaction between a Most‐Favored‐Customer Clause and Price Dispersion: An Empirical Examination of the Medicaid Rebate Rules of 1990," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(1), pages 151-174, March.
    • Handle: RePEc:bla:jemstr:v:6:y:1997:i:1:p:151-174
    DOI: 10.1111/j.1430-9134.1997.00151.x
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    References listed on IDEAS

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    1. Png, I P L & Hirshleifer, D, 1987. "Price Discrimination through Offers to Match Price," The Journal of Business, University of Chicago Press, vol. 60(3), pages 365-383, July.
    2. Fiona Scott Morton, 1997. "The Strategic Response by Pharmaceutical Firms to the Medicaid Most-Favored-Customer Rules," RAND Journal of Economics, The RAND Corporation, vol. 28(2), pages 269-290, Summer.
    3. Steven Salop, 1977. "The Noisy Monopolist: Imperfect Information, Price Dispersion and Price Discrimination," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 44(3), pages 393-406.
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    Cited by:

    1. Emin M. Dinlersoz & Ruben Hernandez-Murillo & Han Li & Roger Sherman, 2008. "Drug prices under the medicare drug discount card program," Review, Federal Reserve Bank of St. Louis, vol. 90(Nov), pages 643-666.

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