Case 12.1: Price discrimination in Practice

1. Why do drug firms give discounts voluntarily?

Drug companies mainly offer discounts in the form of rebates. In a rebate arrangement, the purchaser buys the drugs at the list price, but the seller later refunds the purchaser the rebate amount (Stomberg, 2021). In most cases, the rebate amount is tied to the volume of drugs purchased, purchase loyalty, prompt payment, and increased breadth of purchases (Stomberg, 2021). Therefore, drug companies issue them as a means to encourage purchasers to buy higher volumes and to incentivize them to remain loyal (Stomberg, 2021). Thus, ultimately, drug companies voluntarily offer discounts to make more money and increase their market share from their high-end products.

Secondly, drug firms voluntarily offer discounts as a means to earn preferential treatment on the pharmaceutical formulary (Stomberg, 2021). A formulary is a list of preferred drugs developed using evidence-based medicine and the judgment of experts such as pharmacists and physicians (Stomberg, 2021). The formularys primary purpose is to encourage the use of effective, safe, and the most affordable medication as a means...

By offering rebates, the manufacturer builds a relationship with purchasers, who can, in turn, use their influence to favour the manufacturers brand name over other competing brands. Preferential formulary listing thus provides a means for the manufacturer to increase higher revenues and increase its market share.

2. Why...

…two customer groups if they have different price elasticity. Individual uninsured persons have low responsiveness to drug price changes. Although they pay for their medical expenses out-of-pocket, the uninsured are less responsive to price changes because they still have to incur the costs by themselves nonetheless despite the price change. Insurance companies, on the other hand, are highly price sensitive and have the power to shift from one brand or drug manufacturer to another in response to a price change (Alhabeeb & Moffit, 2012). Due to their low price elasticity, uninsured persons are less likely to respond immediately to price increases and even if one switches from a brand, the effect of the change is minimal. For this…