THINKING CREATIVELY ABOUT PRODUCT MARKETS

CHIRANTAN CHATTERJEE (INDIAN INSTITUTE OF MANAGEMENT, BANGALORE)

JULY 19, 2013 CONFERENCE ON PHARMACEUTICALS COMPETITION COMMISSION OF INDIA

AN EVOLVING LABORATORY

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To understand balance between Health Policy and Industrial Policy.

Dynamic Considerations.

The role of the physician as an agent.

The role of the regulator.

Strategic Groups & Rural-Urban divide.

Price Controls/CLs/Differential Pricing along with Strong Patents.

How to deal with incremental innovation.

Entrepreneurialism – Old and New Age.

WHAT IS A MARKET?

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Economists understand by the term market, not any particular marketplace in which things are bought and sold, but the whole of any region in which buyers and sellers are in such free intercourse with one another that the prices of the same goods tend to equality easily and quickly……. … the more nearly perfect a market is, the stronger is the tendency for the same price to be paid for the same thing at the same time in all parts of the market: but of course if the market is large, allowance must be made for the expense of delivering the goods to different purchasers; each of whom must be supposed to pay in addition to the market price a special charge on account of delivery. Marshall, A., 1920. Principles of Economics, 8th ed. Macmillan, London.

WHAT IS A MARKET?

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• But the ‘Law of One Price’ is hardly a law at all.

• Substantial price dispersion exists giving rise to arbitrage opportunities.

• Regulation influences market-structure and thus competition & prices.

• Transaction costs add to the marginal cost of making a product.

DIFFERENT MARKET STRUCTURES

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Market Structure Seller Entry

Barriers

Seller Number Buyer Entry

Barriers

Buyer Number

Perfect

Competition

No Many No Many

Monopolistic

competition

No Many No Many

Oligopoly Yes Few No Many

Oligopsony No Many Yes Few

Monopoly Yes One No Many

Monopsony No Many Yes One

HOLY GRAIL

REALITY

DIFFERENT MARKET STRUCTURES

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Market Structure Seller Entry

Barriers

Seller Number Buyer Entry

Barriers

Buyer Number

Perfect

Competition

No Many No Many

Monopolistic

competition

No Many No Many

Oligopoly Yes Few No Many

Oligopsony No Many Yes Few

Monopoly Yes One No Many

Monopsony No Many Yes One

HOLY GRAIL

REALITY

WHY DOES MARKET BOUNDARY MATTER?

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• Thus knowing ‘Market Boundary’ matters to guide evidence-based understanding of entry-barriers & ‘Competition Law’.

• Specifically in the case of Drugs & Pharmaceuticals • With heterogeneous consumer preferences. • And differentiated products. • Role of agents. • Starting point maybe cross-elasticity of demand

& supply.

BUT DRAWING THE BOUNDARY MIGHT BE DECEPTIVE – AS HISTORY SUGGESTS

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THE CELLOPHANE PARADOX (1/4)

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• The ‘Cellophane Paradox’ coming out of an anti-monopoly case against du Pont in US in 1953.

• Did du Pont monopolize inter-state trade in cellophane?

• Court found that cellophane faced competition in its various uses from a variety of other products.

• Held that the relevant market is of ‘flexible packaging material’.

• Outcome: "Competitive influences in the flexible packaging markets, place limitations upon du Pont's pricing policies and procedures. They force reduction of du Pont's prices and deny it power to raise prices in the manner of a monopolist.”

THE CELLOPHANE PARADOX (2/4)

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• What does the ‘Cellophane Paradox’ teach competition-specialists?

A. a firm sells a product with few substitutes, which in turn allows the firm to increase the price of that product.

B. such a product has very low cross-price elasticity of demand. C. The hope is that as the price increases, the product will reach

a point where it begins to attract more and more substitutes. D. But does it attract more substitutes? Or by innovating and

holding patents, du Pont exercised market-power ex-ante? E. Mueller & Stocking (1955 AER) pointed out this error of

mistaking a monopolist's inability to exercise market power by raising price above the current price for an inability to have already exercised market power by raising price significantly above the competitive price.

THE CELLOPHANE PARADOX (3/4)

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• Informally: - In this case, Du Pont (a cellophane producer) argued that cellophane was

not a separate relevant market since it competed with flexible packaging materials such as aluminum foil, wax paper and polyethylene.

- The problem was that Du Pont, being the sole producer of cellophane, had set prices at the monopoly level, and it was at this level that consumers viewed those other products as substitutes.

- Instead, at the competitive level, consumers viewed cellophane as a unique relevant market (a small but significant increase in prices would not have them switching to goods like wax or the others).

- US Supreme Court failed to recognize that a high own-price elasticity may mean that a firm is already exercising monopoly power.

THE CELLOPHANE PARADOX (4/4)

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• Last year Lemley & Mckenna revisited the ‘Cellophane paradox’ in

their ‘Is Pepsi Really a Substitute for Coke?’ paper: • Applying antitrust's traditional market definition to IP goods leads

to some startling results. Despite the received wisdom that IP rights don't necessarily confer market power, a wide array of IP rights do exactly that under traditional antitrust principles. This result requires us to rethink both the overly-rigid way we define markets in antitrust law and the competitive consequences of granting IP protection. Both antitrust and IP must begin to think realistically about those consequences, rather than falling back on rigid formulas or recitation of the mantra that there is no conflict between IP and antitrust.

LEARNINGS FROM HISTORY

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• The ‘Cellophane Paradox’ has given rise to follow-on cases in the US and competition law that forbids mergers among companies (Bethlehem Steel and Youngstown Sheet and Tube Company).

• One test that has since then been used to understand market boundaries is the test of a product’s “peculiar characteristics and uses”.

• But obviously defining market-boundary still challenges economists & competition specialists.

• Key message: both an art as well as a science, especially if one has to trade-off between narrowness and broadness of markets.

SOME SCIENCE (AND TESTS) TO UNDERSTAND MARKET-BOUNDARIES

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• SSNIP TEST: Small but significant and non-transitory increase in price test • The test consists of observing whether a small increase in price (in

the range of 5 to 10 percent) would provoke a significant number of consumers to switch to another product (in fact, substitute product). In other words, it is designed to analyse whether that increase in price would be profitable or if, instead, it would just induce substitution, making it unprofitable.

• Estimates ‘residual demand’. See wiki for example. • Useful but might have problems:

a) SSNIP test on A's products will not necessarily yield the same relevant market as applying the SSNIP test on B's products in evaluating merger of A and B.

b) Doesn’t factor in ‘cross-price elasticity’ / just ‘own-price elasticity’ of demand.

c) Measures competition based on ‘price’ alone. d) Remember the ‘Cellophane paradox’. e) Look up Elzinga Hogarty test as an alternative

MULTI-DIMENSIONS FOR PRODUCT MARKETS IN PHARMA

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Firms (Generics, Branded Generics, Patented Drugs).

Product Market Codes

Anatomical Therapeutic Classification (WHO) EPHRMA Codes. Roughly similar – one can build cross-walks between ATC & EPHRMA

Geographic Markets

Urban versus Rural or SEC A and A- versus rest of the cities. (Could be supplier driven)

North – East – West – South. Metro versus Non-Metro. States: Gujarat/West Bengal/Etc.

Distribution Channel Based

Chemistry-Based Drugs sold through Distributors/Retailers/Chemists vs. Biologicals sold directly through hospitals.

Private purchase versus sales through government channels.

UNDERSTANDING GEOGRAPHY BETTER

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Price

Quantity

Urban Demand Curve

Non-Urban Demand Curve

CAVEAT FOR PRODUCT MARKETS IN PHARMA

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NOTE:

1) Underlying each is a TIME ELEMENT based on month/quarter/year,

before and after institutional shifts like TRIPs or DPCOs.

2) Relevant Product Market Definition DEPENDS ON QUESTION Being

Investigated.

3) Contingent on SOURCE OF DATA: IMS, AIOCD, Survey-Based

Collection, Government Agencies.

4) Question dictates which is a better data-source? NO SINGLE

SOURCE IS UNIVERSALLY THE BEST!

POSSIBLE COMBINATIONS FOR PRODUCT MARKETS IN PHARMA

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MONTH QUARTER YEAR

FIRM

PRODUCT MARKET

GEOGRAPHY

DISTRIBUTION CHANNEL BASED

FIRM-PRODUCT MARKET

FIRM-PRODUCT MARKET-GEOGRAPHY

FIRM-PRODUCT MARKET-GEOGRAPHY-CHANNEL

PRODUCT MARKET-GEOGRAPHY

PRODUCT MARKET - CHANNEL

PRODUCT MARKET - GEOGRAPHY - CHANNEL

THIS IS WHERE THE FUN STARTS ON

MEASURING CROSS-MARKET ELASTICITY OF

DEMAND

EXAMPLES TO UNDERSTAND PRODUCT MARKETS IN PHARMA : ATC CODES

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ATC N – Central Nervous System

Drugs N1 Anesthetics N2 Analgesics N3 Antiepileptics N4 Anti-Parkinson N5 Psycholeptics N6 Psychoanaleptics N7 Other CNS drugs

N5A1 ATYPICAL ANTIPSYCHOTICS N5A9 CONVNTL ANTIPSYCHOTICS N5B1 NON-BARBITURATE PLAIN N5B2 NON-BARBITURATE COMBS N5B3 BARBITURATE PLAIN N5B5 HERB HYPNOTICS/SEDATIVES N5C0 TRANQUILLISERS

Molecule 2 or the Active Ingredient

Molecule 3/Active Ingredient

Molecule 1 or the Active Ingredient

CROSS/WITHIN/EXTRA MOLECULAR SUBSTITUTION

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ATC4 Market

Brand A Brand B

Brand C

ATC4

Market

Brand A

Brand B

Brand C

ATC4 Market

Brand A/Mol-1

Generic B

Brand B/Mol-2

Brand C/Mol-3

Source: Branstetter, Chatterjee & Higgins (2011 & 2012)

CROSS/WITHIN/EXTRA MOLECULAR SUBSTITUTION

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ATC4 Market

Brand A Brand B

Brand C

ATC4

Market

Brand A

Brand B

Brand C

ATC4 Market

Brand A/Mol-1

Generic B

Brand B/Mol-2

Brand C/Mol-3

Source: Branstetter, Chatterjee & Higgins (2011 & 2012)

Market Boundary 1

- WMS

Market Boundary 2

-CMS

Market Boundary 3

Including OUTSIDE

GOOD -EMS

EXAMPLES TO UNDERSTAND PRODUCT MARKETS IN PHARMA : EPHRMA CODES

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Class EPHRMA-2 Group EPHRMA-3 Mol./AI EPHRMA-4 ANTI-NEOPLASTICS L1 ALKYLATING AGENTS L1A CHLORAMBUCIL L1A1 ANTI-NEOPLASTICS L1 ALKYLATING AGENTS L1A THIOTEPA L1A10 ANTI-NEOPLASTICS L1 ALKYLATING AGENTS L1A BENDAMUSTINE L1A12 ANTI-NEOPLASTICS L1 ALKYLATING AGENTS L1A CARMUSTINE L1A13 ANTI-NEOPLASTICS L1 ALKYLATING AGENTS L1A LOMUSTINE L1A15 ANTI-NEOPLASTICS L1 ALKYLATING AGENTS L1A BUSULFAN L1A18 ANTI-NEOPLASTICS L1 ALKYLATING AGENTS L1A DACARBAZINE L1A23 ANTI-NEOPLASTICS L1 ALKYLATING AGENTS L1A CYCLOPHOSPHAMIDE L1A3 ANTI-NEOPLASTICS L1 ALKYLATING AGENTS L1A IFOSFAMIDE L1A4 ANTI-NEOPLASTICS L1 ALKYLATING AGENTS L1A MELPHALAN L1A5 ANTI-NEOPLASTICS L1 ALKYLATING AGENTS L1A TEMOZOLOMIDE L1A24 ANTI-NEOPLASTICS L1 ALKYLATING AGENTS L1A ALTRETAMINE L1A25 ANTI-NEOPLASTICS L1 ANTIMETABOLITES L1B METHOTREXATE L1B1 ANTI-NEOPLASTICS L1 ANTIMETABOLITES L1B CAPECITABINE L1B2 ANTI-NEOPLASTICS L1 ANTIMETABOLITES L1B CARMOFUR L1B3 ANTI-NEOPLASTICS L1 ANTIMETABOLITES L1B CYTARABINE L1B4 ANTI-NEOPLASTICS L1 ANTIMETABOLITES L1B FLUOROURACIL L1B5 ANTI-NEOPLASTICS L1 ANTIMETABOLITES L1B TEGAFUR L1B6 ANTI-NEOPLASTICS L1 ANTIMETABOLITES L1B FLUDARABINE L1B7 ANTI-NEOPLASTICS L1 ANTIMETABOLITES L1B MERCAPTOPURINE L1B8 ANTI-NEOPLASTICS L1 ANTIMETABOLITES L1B TIOGUANINE L1B9 ANTI-NEOPLASTICS L1 ANTIMETABOLITES L1B GEMCITABINE L1B10 ANTI-NEOPLASTICS L1 ANTIMETABOLITES L1B PEMETREXED L1B11 ANTI-NEOPLASTICS L1 ANTIMETABOLITES L1B DOXIFLURIDINE L1B12 ANTI-NEOPLASTICS L1 ANTIMETABOLITES L1B LAPATINIB L1B14

DATA STRUCTURE TO APPLY ECONOMETRICS (UNBALANCED PANEL)

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MOLECULE FIRMNAME BRANDNAME SKU STATE MONTH MONTHID Q PRICES

IMATINIB MESYLATE

ALKEM LABORATORIES

LTD. ALTANIB - ALK ALTANIB 100 MG

CAPSULE 10 PUNJAB 2007-April 1

IMATINIB MESYLATE

ALKEM LABORATORIES

LTD. ALTANIB - ALK ALTANIB 100 MG

CAPSULE 10 PUNJAB 2007-May 2

IMATINIB MESYLATE

ALKEM LABORATORIES

LTD. ALTANIB - ALK ALTANIB 100 MG

CAPSULE 10 PUNJAB 2007-Jun 3

IMATINIB MESYLATE

ALKEM LABORATORIES

LTD. ALTANIB - ALK ALTANIB 100 MG

CAPSULE 10 PUNJAB 2007-Jul 4

IMATINIB MESYLATE

ALKEM LABORATORIES

LTD. ALTANIB - ALK ALTANIB 100 MG

CAPSULE 10 PUNJAB 2007-Aug 5

IMATINIB MESYLATE

ALKEM LABORATORIES

LTD. ALTANIB - ALK ALTANIB 100 MG

CAPSULE 10 PUNJAB 2007-Sep 6

IMATINIB MESYLATE

ALKEM LABORATORIES

LTD. ALTANIB - ALK ALTANIB 100 MG

CAPSULE 10 PUNJAB 2007-Oct 7

IMATINIB MESYLATE

ALKEM LABORATORIES

LTD. ALTANIB - ALK ALTANIB 100 MG

CAPSULE 10 PUNJAB 2007-Nov 8

Product Market:

ATC/EPHRMA 4/3/2 or at the Molecule Level

Firm Brand Dosage Form

Geography Time Price & Quantity Information

MARKET DEFINITION IS NUANCED & DEPENDS ON THE POLICY QUESTION

1. Is Differential Pricing by MNC firms beneficial to society?

2. Is Compulsory Licensing Useful to Enhance Access to Medicines?

3. How is the BOP firm focused on rural-markets impacting competition?

4. Is Daiichi-Ranbaxy Merger Beneficial for Competition?

5. Are first mover-advantages relevant? If so how?

6. How are biological drugs impacting demand for conventional drugs?

7. Did TRIPS enhance or reduce societal welfare?

8. How do channels moderate drug demand?

9. What does drug-combinations (rational or irrational) do to competition?

10. Should one move to MBP from CBP for Price Controls – its effects?

11. What is the impact of generic-at-risk launch on patented drug and its

competition?

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OTHER DEFINITION OF MARKETS

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TRADING MARKETS Identify who might care about the boundary, rather than identify the boundary. Raises the idea of ‘exchange’ and of ‘price discrimination’.

ANTI-TRUST MARKETS . . . product or a group of products and a geographical area in which it is sold such

that a hypothetical, profit maximizing firm, not subject to price regulation, that was the only present and future seller of those products in that area would impose a ‘small but significant and non-transitory’ increase in price above prevailing or likely future levels.

Counterfactual construct difficult to identify. Heuristic to follow (see Geroski (1998)) but murky for differentiated products like

pharmaceuticals.

STRATEGIC MARKETS. Guided by the supply-side, a firm’s capability, routines, identity and also by strategic

innovation. Incorporates a need-based demand approach in conjunction with supply-side

approach.

Source: Geroski (1998)

UNDERSTANDING THE BROAD PHILOSOPHY (SCP TO RBV/IO TO NEIO)

Structure - > Conduct - > Performance

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UNDERSTANDING THE BROAD PHILOSOPHY (SCP TO RBV/IO TO NEIO)

Resource Based View & NEIO

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SOME OF MY RESEARCH QUESTIONS

BOP Entry by Mankind-like firms & Price Dispersion in

Cardiovascular Markets.

Erosion of First Mover Advantages Before/After TRIPs.

Differential Pricing, Compulsory Licensing & Welfare.

The Evolution of Science in Indian Pharmaceutical Industry.

Check http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=830407 for

details.

Q&A ?

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CONCLUSION: A PILL MIGHT NOT BE SAME AS A ROSE

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"A rose by any other name would smell as sweet“… But maybe not a pill..

THANK YOU

Email:

chirantan.chatterjee@iimb.ernet.in

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