Pharma Price Control and Policy Schizophrenia – II: Cheating the consumer

Over the previous post, I summarised the events that led up to the current government’s ostensible decision to disband the National Pharmaceutical Pricing Authority and pave the way for a radical curtailment in the scope of pharmaceutical price control. While pressure groups such as the AIDAN, and other political agents (such as the Swadeshi Jagran Manch) have viewed the move as an egregious attempt to pull the rug from underneath the feet of patients, the question remains whether the DPCO was effective in enhancing access to medicines in the first place. The objective of price control is to broaden access to medicines in the short run, thus enhancing consumer welfare, while also ensuring that manufacturers have sufficient incentive to continue supplying the market within the ceiling price. When evaluated against these goals, I argue that the current price control regime has failed.

Market structure

The market for pharmaceutical formulations is unique, both with reference to other product markets in India, and with reference to pharmaceutical markets abroad. This is because unlike most other geographic or product markets, the Indian pharmaceutical market is characterised by a strong middle player that mediates the relationship between the producers of drugs and their consumers.

Organisations such as the All India Organisation of Chemists and Druggists represent this unique phenomenon, in which a consolidated union of middlemen in the pharmaceutical supply chain have immense bargaining power as against producers as well as consumers. The market features nearly 100% retail consolidation, to the extent that manufacturers must virtually sell their products to a monopsony. This is because the AIOCD and its sister organisations operate to maximise their own interests at two levels, as exposed in two separate investigations carried into them by the Competition Commission of India. Associations of chemists and druggists (of which the AIOCD is the apex body) have consistently fallen foul of the CCI’s rulings, meaning that their anti-competitive market consolidation and monopsonistic practices are not isolated, but form a pattern. In 2011, a range of stockists and other wholesale drug suppliers informed the CCI of anticompetitive conduct by the AIOCD and its sister organisations. In its orders in these matters, the CCI has returned findings that the AIOCD and its members have blatantly violated Section 3 of the Competition Act with impunity, maximising their cash flow at the expense of consumers and manufacturers of drugs. The AIOCD was found to have colluded with associations of drug manufacturers (OPPI and IDMA) to fix retail prices, as well as to fix price margins.

An AIOCD-style trade boycott in progress.

The AIOCD’s relationship with manufacturers is complex. On the one hand, it represents the consolidation of virtually every single retail player in the Indian drugs market, meaning that the manufacturer’s market access is entirely dependent on the AIOCD. On the other hand, the AIOCD’s all-pervasive influence over its members means that it has immense bargaining power against manufacturers, thus infringing upon their right to set prices for their products. The AIOCD’s vast territorial reach and significant influence over its members means that it enjoys a virtual monopsony vis-à-vis manufacturers, as well as a virtual monopoly vis-à-vis consumers. Because of this, it has the ability to squeeze out a lion’s share of the revenue arising from the value chain in pharmaceutical products sold in India. In addition, the CCI has recorded instances of the AIOCD and its members organising trade boycotts of manufacturers, wholesalers and retailers that offered discounts or set prices without its consent. These factors indicate that the market for drugs in India is particularly vulnerable to both supply-side dominance (vis-à-vis consumers) and demand-side dominance (vis-à-vis manufacturers), and that such dominance is likely to be exerted against manufacturers, stockists and retailers who disobey the AIOCD’s diktats.

Co-ordinated price increases to cheat price control

While demand-side consolidation has frequently been used as a defence against Section 4-type abuse of dominance claims by market players (who counter the accusation by arguing that the countervailing market power afforded by such consolidation militates against their own dominant position in the market), the issue at hand does not involve abuse of dominance. On the contrary, the circumvention of price control occurs through a coordinated price increase in the period immediately preceding price regulation, so as to raise the market-based ceiling price. In this context, demand consolidation in the form of intermediary associations has an anti-competitive effect, inasmuch as these associations act as gatekeepers of the consumer market and hold manufacturers to ransom.

One study (Health Policy and Planning, 32, 2017, 194–204) tracked the price of the off-patent anti-diabetic metformin between 2007 and 2015 to study the impact of the DPCO 2013. In an ostensibly competitive market, with an average of 61 manufacturers selling 69 versions of the drug in any given month, the drug was priced at INR 1 per 500mg dose in 2007. Given the nature of the market, prices should have remained constant or increased steadily, as they do in the control period (between 2007 and 2009). Upon the initiation of stakeholder consultation by the government to draft the NLEM 2011, manufacturers began a rapid and coordinated price escalation, armed with the knowledge that the 500mg dosage of the drug would fall in the list. The 1000mg dosage did not figure in the NLEM, and was used as a reference in the study. The 2011-2013 period witnessed a steep rise in the average price of the 500mg dosage, without a similar rise in the price of the 1000mg tablet. Upon the fixation of the ceiling price under the DPCO 2013 (at approximately INR 1.6 per 500mg tablet), prices marginally reduced under the ceiling. The market data is conclusive: manufacturers coordinated selectively in the 500mg tablet market between 2011 and 2013 to raise the ceiling price of the drug.

It is important to note that the structure of the drugs market in India makes it extremely difficult for firms to cheat their way out of horizontal agreements to circumvent price controls through coordinated price increases. This is because any deviation by a manufacturer would likely be met with swift retribution from industry associations in the form of a sales boycott and the accompanying denial of market access. These factors severely disincentivise cheating horizontal agreements, meaning that the game theoretical foundations of cartel-busting simply fail to work in the context of the Indian drugs market.

In the final post of this series, I argue that price control can actively cause harm by effectively immunising certain actions from antitrust scrutiny, and point to more effective ways to maximise access to drugs.



About The Author

Leave a Comment

Scroll to Top