Taking the competitor's pill: When combination therapies enter pharmaceutical markets

We study the competitive effects of combination therapies in pharmaceutical markets, which crucially hinge on the additional therapeutic value of combinatory use of drugs and the therapeutic substitutability with the most relevant monotherapy. If the therapeutic value is sufficiently large, the introduction of combination therapies leads to higher prices and, somewhat paradoxically, may reduce the health plan's surplus, defined as total health benefits net of drug expenditures. If the firms are allowed to coordinate their price setting, this will lead to higher prices under uniform pricing but lower prices under indication-based pricing. Allowing for the latter type of pricing scheme might increase allocational efficiency, but only at the expense of higher drug expenditures.