Product Market Definition in Pharmaceutical Antitrust Cases: Evaluating Cross-Price Elasticity of Demand

Abstract

The pharmaceutical industry has, for some time, been a major target of antitrust investigations and litigation. In fact, from 2000 to 2010, twenty-eight of the 229 merger enforcement actions initiated by the Federal Trade Commission (FTC) involved prescription drugs. During the same time period, the FTC also initiated ninety-two nonmerger competition enforcement actions, eleven of which involved prescription drugs. Thus, in the eleven-year span from 2000 to 2010, prescription drugs were the subject of 12% of both merger and nonmerger enforcement actions. The significance of antitrust enforcement in the context of the pharmaceutical industry is further highlighted by the fact that prescription drugs account for approximately 10% of healthcare spending in the United States. Health care spending increased by 4.0% in 2009 to a total of $2.5 trillion–17.6% of U.S. Gross Domestic Product (GDP)–with $250 billion being spent on prescription drugs alone.

Given the significance of prescription drugs to both healthcare quality and cost, and the frequency with which pharmaceutical manufacturers face antitrust scrutiny, appropriate consideration should be given to the characteristics of the pharmaceutical market that may obstruct effective antitrust enforcement. In particular, the first step in analyzing whether a defendant possesses market power is defining the “relevant market” –a step that may be complicated by the peculiar structure of the pharmaceutical market. Determining whether the defendant has market power is important because legality of business conduct often turns on whether that conduct was performed with or without market power. Furthermore, the relevant market consists of both a geographic and a product market. This Note argues that, despite case law to the contrary, the traditional tests to determine the relevant product market for antitrust purposes do not sufficiently address the unique structure of the pharmaceutical market. Specifically, courts do not consider all of the “consumers” that affect pharmaceutical purchasing decisions. As a consequence of the existence of multiple decision-makers, the traditional cross elasticity of demand test for defining product markets is inappropriate in the pharmaceutical context, as relying on it may result in overly narrow product markets. To overcome the difficulties presented by cross elasticity of demand, this Note advocates adopting an approach to pharmaceutical market definition that focuses on non-price elements of competition rather than cross elasticity of demand.