Pharmaceutical Benefits Managers (PBMS) are intermediaries between upstream drug manufacturers and downstream insurance companies. They design formularies (lists of drugs that insurance will cover) and negotiate prices with drug companies. PBMS want a wider variety of drugs available to their insured populations, but at low prices. Suppose that a PBM is negotiating with the makers of two nondrowsy allergy drugs, Claritin and Allegra, for inclusion on the formulary. The "value" or "surplus" created by including one nondrowsy allergy drug on the formulary is $142 million, but the value of adding a second drug is only $28 million. Assume the PBM bargains by telling each drug company that it's going to reach an agreement with the other drug company. Under the non-strategic view of bargaining, the PBM would earn a surplus of $ surplus of $ million. Now suppose the two drug companies merge. What is the likely postmerger bargaining outcome? Under the nonstrategic view of bargaining, the PBM would earn a surplus of $ surplus of $ million. million, while each drug company would earn a million, while the merged drug company would earn a

Managerial Economics: A Problem Solving Approach
5th Edition
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Chapter16: Bargaining
Section: Chapter Questions
Problem 16.6IP
Question
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Pharmaceutical Benefits Managers (PBMS) are intermediaries between upstream drug manufacturers and downstream insurance companies. They
design formularies (lists of drugs that insurance will cover) and negotiate prices with drug companies. PBMS want a wider variety of drugs available to
their insured populations, but at low prices. Suppose that a PBM is negotiating with the makers of two nondrowsy allergy drugs, Claritin and Allegra,
for inclusion on the formulary. The "value" or "surplus" created by including one nondrowsy allergy drug on the formulary is $142 million, but the
value of adding a second drug is only $28 million.
Assume the PBM bargains by telling each drug company that it's going to reach an agreement with the other drug company.
Under the non-strategic view of bargaining, the PBM would earn a surplus of $
surplus of $
million.
Now suppose the two drug companies merge. What is the likely postmerger bargaining outcome?
Under the nonstrategic view of bargaining, the PBM would earn a surplus of $
surplus of $
million.
million, while each drug company would earn a
million, while the merged drug company would earn a
Transcribed Image Text:Pharmaceutical Benefits Managers (PBMS) are intermediaries between upstream drug manufacturers and downstream insurance companies. They design formularies (lists of drugs that insurance will cover) and negotiate prices with drug companies. PBMS want a wider variety of drugs available to their insured populations, but at low prices. Suppose that a PBM is negotiating with the makers of two nondrowsy allergy drugs, Claritin and Allegra, for inclusion on the formulary. The "value" or "surplus" created by including one nondrowsy allergy drug on the formulary is $142 million, but the value of adding a second drug is only $28 million. Assume the PBM bargains by telling each drug company that it's going to reach an agreement with the other drug company. Under the non-strategic view of bargaining, the PBM would earn a surplus of $ surplus of $ million. Now suppose the two drug companies merge. What is the likely postmerger bargaining outcome? Under the nonstrategic view of bargaining, the PBM would earn a surplus of $ surplus of $ million. million, while each drug company would earn a million, while the merged drug company would earn a
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