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The B.E. Journal of Economic Analysis & Policy

Editor-in-Chief: Jürges, Hendrik / Ludwig, Sandra

Ed. by Auriol , Emmanuelle / Brunner, Johann / Fleck, Robert / Mendola, Mariapia / Requate, Till / Schirle, Tammy / de Vries, Frans / Zulehner, Christine

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Monopoly Pricing under a Medicaid-Style Most-Favored-Customer Clause and Its Welfare Implication

Peter Klibanoff
  • 1Northwestern University,
/ Tapas Kundu
  • 2University of Oslo,
Published Online: 2010-08-28 | DOI: https://doi.org/10.2202/1935-1682.2419


To control Medicaid's expenditure on prescription drugs, 1990 legislation established a rebate program guaranteeing Medicaid a rebate on each unit purchased by Medicaid participants. The rebate is the difference between the minimum price and the average manufacturer price (minimum price rule) or a proportion of the average manufacturer price (average price rule). We characterize the optimal pricing strategy of a third-degree price discriminating monopolist under these rules. Under the minimum price rule, the minimum price gross of rebate always increases whereas prices gross of rebate in at least some of the markets always decrease. In contrast, under the average price rule, these prices may move in the same direction in all markets, with all increasing in some circumstances and all decreasing in others. We also examine the effects of such provisions on social welfare. We analyze a modified version of our minimum price rule model suitable for applications beyond Medicaid.

Keywords: monopoly pricing; Medicaid; MFC; welfare

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Published Online: 2010-08-28

Citation Information: The B.E. Journal of Economic Analysis & Policy, ISSN (Online) 1935-1682, DOI: https://doi.org/10.2202/1935-1682.2419. Export Citation

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