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Equilibrium Effects of Pharmaceutical Bundling: Evidence from India

We study the equilibrium effects of competitive bundling on market outcomes and social welfare in the context of the Indian pharmaceutical industry. Fixed-dose combinations (FDCs), which bundle two or more drugs in a single pill, account for over 50% of pharmaceutical revenue in India. Using an equilibrium model of drug demand and supply, we show that the price and welfare effects of FDCs are theoretically ambiguous. Empirically, we find that FDCs on average sell at a 28% discount but increase standalone component prices by 3%. New FDCs significantly increase sales of drug bundles. To quantify the welfare effects of FDCs, we estimate the model in the market for Alzheimer’s drugs. We find that FDCs increase consumer surplus by 21% and firm profits by 13% because of significant market expansion and cost savings. Counterfactual analysis shows that applying FDC regulations from the US to India could deter FDC entry and forestall potential welfare benefits.

Shengmao Cao
Chirantan Chatterjee
Publication Date
January, 2022