Distribution, Competition, and Antitrust / IP Law

Archives for January 2012

FTC Sues to Block Long-Term Pharmacy Acquisition

On January 27, the FTC filed an administrative complaint to block the proposed merger of Omnicare, Inc. and PharMerica Corp, the country’s two largest long-term care pharmacies.

According to the FTC, the Kentucky-based Omnicare’s $440 million acquisition would produce a firm with more than half of the U.S. market for pharmacy services at nursing homes and other long-term care facilities.  Patients at such facilities often receive prescriptions from Medicare Part D sponsors, which contract or work with Skilled Nursing Facilities (SNFs) to provide medications.

PharMerica is allegedly Omnicare’s largest and only national competitor.  According to the FTC, the merger would allow the combined company to force sponsors to accept higher prescription prices or risk being barred from offering Part D plans.  That is because to protect the fragile patient population and ensure that they receive the Part D benefits they are entitled to, the federal government requires Part D plans to provide SNF residents with “convenient access” to a network of long-term care pharmacies, such as Omnicare and PharMerica.  This ensures that SNF residents can get their prescription drugs from a long-term care pharmacy that contracts with the residents’ chosen Part D health plan. Health plans that cannot provide their beneficiaries with “convenient access” to long-term care pharmacies risk being barred from offering Medicare Part D health plans.

Due to its substantial market share, the combined firm likely would be a “must have” for Part D health plans, the FTC contends. Losing contracts with a combined Omnicare/PharMerica would put the Part D health plans at serious risk of failing to meet CMS’s “convenient access” standard.  This increased risk would allegedly provide the combined firm with an anticompetitive advantage in negotiating prices it charges Part D health plans for long-term care pharmacy services.

According to the complaint, any drug price increase would eventually be passed along to the government, which subsidizes close to 75% of the costs of Part D plans.

PharMerica has been fighting to resist the deal itself.

Is the iPad a Personal Computer?

Horace Dediu has an in-depth look at the PC industry entitled “The rise and fall of personal computing.” You can read the whole thing here.  Here are some of his conclusions:

“If iOS and Android are added as potential substitutions for personal computing, the share of PCs suddenly collapses to less than 50%. It also suggests much more collapse to come.

I will concede that this last view is extremist. It does not reflect a competition that exists in real life. However, I put this data together to show a historic pattern. Sometimes extremism is a better point of view than conservatism.”

Horace’s data analysis is quite interesting.  I don’t know for certain whether there are any problems in the way he has gathered and presented the data.  Nor do I know whether or not an iPad is in the same market as a PC.  But the data raise an interesting and relatively frequent question in competition law cases: how does one determine when two products are in the same relevant market?

Sherman Act Section 2 claims require a plaintiff to establish a relevant market.  See, e.g., Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 456 (1993) (attempted monopolization claims).  “Without a definition of [the] market, there is no way to measure [a defendant’s] ability to lessen or destroy competition.”  Walker Process Equip., Inc. v. Food Mach. & Chem. Corp., 382 U.S. 172, 177 (1965).

“The outer boundaries of a product market are determined by the reasonable interchangeability of use or the cross-elasticity of demand between the product itself and substitutes for it.”  Brown Shoe Co. v. United States, 370 U.S. 294, 325 (1962).  The cross-elasticity of demand is an economic variable that measures the change in the quantity demanded by consumers of one product relative to the change in price of another.  A high cross-elasticity indicates that two products are close substitutes for each other and may be in the same market.

This, then, is the essential (but not the only) question in determining whether the iPad is in the same market as PCs — at least for antitrust law purposes: do iPads and PCs have a relatively high cross-elasticity of demand?  In other words, if PC prices increase, will consumers substitute away from PCs and buy iPads instead?  Also relevant is the inverse question: if iPad prices go up, will consumers buy more PCs?

I don’t know the answers to these questions, but the answers could be very important in any future case where PC market share is at issue.  You may have your own opinions, based on ancedotal impressions and data.



Happy New Year

More posts coming in the near future.

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