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With expenditures totaling $227 billion in 2007, prescription drug purchases are a growing portion of the total medical expenditure, and as this industry continues to grow, prescription drugs will continue to be a critical part of the larger health care industry. This chapter presents a survey on the economics of the US pharmaceutical industry, with a focus on the role of R&D and marketing, the determinants (and complications) of prescription drug pricing, and various aspects of consumer behavior specific to this industry, such as prescription drug regulation, the patient's interaction with the physician, and insurance coverage. This chapter also provides background in areas not often considered in the economics literature, such as the role of pharmacy benefit managers in prescription drug prices and the differentiation between alternative measures of prescription drug prices.

Objective – To examine whether local area pharmacy market structure influences contract terms between prescription drug plans (PDPs) and pharmacies under Part D.

Data – Data were collected and compiled from four sources: a national mail survey to independent pharmacies, National Council for Prescription Drug Programs (NCPDP) Pharmacy database, 2000 U.S. Census data, and 2006 Economic Census data.

Results – Reimbursements varied substantially across pharmacies. Reimbursement for 20mg Lipitor (30 tablets) ranged from $62.40 to $154.80, and for 10mg Lisinopril (30 tablets), it ranged from $1.05 to $18. For brand-name drug Lipitor, local area pharmacy ownership concentration had a consistent positive effect on pharmacy bargaining power across model specifications (estimates between 0.084 and 0.097), while local area per capita income had a consistent negative effect on pharmacy bargaining power across specifications(−0.149 to −0.153). Few statistically significant relationships were found for generic drug Lisinopril.

Conclusion – Significant variation exists in PDP reimbursement and pharmacy bargaining power with PDPs. Pharmacy bargaining power is negatively related to the competition level and the income level in the area. These relationships are stronger for brand name than for generics. As contract offers tend to be non-negotiable, variation in reimbursements and pharmacy bargaining power reflect differences in initial insurer contract offerings. Such observations fit Rubinstein's subgame perfect equilibrium model.

Implication – Our results suggest pharmacies at the most risk of closing due to low reimbursements are in areas with many competing pharmacies. This implies that closures related to Part D changes will have limited effect on Medicare beneficiaries’ access to pharmacies.

In Canada, grain handling is an important agri-business that has traditionally been cooperative in nature (for example, Saskatchewan Wheat Pool). At the same time the industry is heavily regulated. There has been a dramatic change in the structure of the industry over the past 20 years and there are currently no major cooperatives present in the market. If the “yardstick effect” hypothesis of the role of cooperatives in an imperfectly competitive market is true, the disappearance of cooperatives could result in the ability of remaining firms to exercise market power over producers. To investigate the impact of changes in ownership structure in the market, we estimated two types of pricing games that might have been played between a cooperative, Saskatchewan Wheat Pool (SWP) and an investor-owned firm (IOF), Pioneer Grain (PG) in the Saskatchewan wheat-handling market over the period 1980–2004, with different assumptions about their pricing behavior imposed. We find that SWP and PG have likely been playing a Bertrand pricing game in the market over the period. We thus conclude that SWP, as the largest cooperative in the market, likely played a “yardstick effect” role in the market.