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Antitrust Law Journal

Volume 82, Issue 2

Excessive Drug Pricing As An Antitrust Violation

Harry First


  • Provides a general discussion of the problem of high drug prices and examples of non-antitrust approaches to this problem.
  • Reviews the current antitrust approach to excessive pricing and the assumed inapplicability of Section 2. 
  • Suggests that the enforcement approach taken regarding patent licensing be a basis for Section 2 enforcement for high drug prices. 
  • Examines foreign competition enforcement activity against excessive drug pricing as an abuse of dominance. 
  • Provides examples of excessive pricing that could be the basis of Antitrust liability under Section 2. 
  • Provides suggestions an antitrust enforcement program against excessive pricing.
Excessive Drug Pricing As An Antitrust Violation
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We have become all too familiar with a recurring pattern in pharmaceutical drug pricing. First, a report is published about an astonishing rise in the price of a pharmaceutical drug that patients need for a life-threatening illness or event. Denunciations of price gouging then come quickly. Politicians send letters to the drug companies asking for explanations. Congressional hearings are held. Corporate executives try to explain—they don’t make so much (middle-men take the profit), they don’t make enough (new drugs cost a lot to develop), pharmaceutical drug regulation is really to blame. They then offer some relief (maybe coupons to consumers to help with deductibles), but not much. It’s all a version of what our parents told us—take your medicine, it will be good for you, it’s not our fault if it tastes bad, that can’t be helped.

But is it true that it can’t be helped? Various public policy approaches have been advanced: allow (or require) government agencies to bargain over prices, require greater transparency in drug pricing, increase imports, forbid drug companies from issuing coupons to consumers, force drug companies to manufacture in the United States, reduce (or maybe eliminate) aspects of FDA regulation, jaw-bone pharmaceutical companies into lowering prices. Politicians and bureaucrats have stepped up the rhetoric—presidential candidates condemn, a president threatens, administrators form task forces—and drug companies have rolled back price increases a bit (but have still raised prices overall). When effective federal action does not materialize, states try to fill the gap. So far, though, either the proposals have made little sense or, even if sensible and adopted, have had little effect.

One might think that antitrust would be on the list of public policy tools to wield against high pharmaceutical prices, but it’s not. Of course, there have been antitrust enforcement efforts against various pharmaceutical practices that elevate price above the competitive level. For almost 20 years the FTC has been challenging reverse payments (or pay-for-delay) made by branded pharmaceutical companies to generics in return for their promise to stay out of the market for some period of time, an enforcement effort that is ongoing. Product hopping has been successfully attacked by the New York State Attorney General. An investigation into collusion among generic drug manufacturers, underway at the Department of Justice, has resulted in criminal charges against two executives, along with a threat of a treble-damages action by the Justice Department to recover damages that the United States has sustained in overpaying for generic drugs. Forty-seven state attorneys general have filed a civil suit alleging damages to their governments and citizens arising out of generic company collusion.

Nevertheless, the core problem remains. Prices for certain pharmaceutical drugs seem astonishingly high. Antitrust law outlaws non-competitive pricing in certain situations (cartels, for example), but can antitrust law be used to condemn high drug prices by themselves?

The conventional wisdom is that U.S. antitrust laws do not forbid high prices simpliciter, but I think that we are not forever condemned to that result. Closer examination of prior efforts to deal with excessive prices in other areas of the economy shows a willingness to take on excessively high prices, at least where the seller is exploiting what might be a temporary power to raise prices of much-needed products. Further, closer examination of antitrust case law shows that there is no direct precedent barring the courts from finding that raising prices to an excessive level is conduct that violates Section 2 of the Sherman Act. Indeed, decisions in the area of licensing of standard essential patents come close to condemning such pricing.

My argument for antitrust consideration of excessive drug pricing begins with a more general discussion of the problem of high prices and two examples of a non-antitrust approach to this problem. I then focus on the current antitrust approach to excessive pricing and the assumed inapplicability of Section 2 of the Sherman Act to a monopolist’s excessive pricing. I compare that approach to how U.S. courts and enforcers have handled standard essential patent licensing and how competition law enforcers outside the United States are now tackling the issue of excessive pharmaceutical drug pricing as an abuse of dominance. I then look at three examples of excessive pricing of pharmaceutical drugs, arguing that excessive pricing could be the basis of antitrust liability under Section 2 in each case. I conclude with some suggestions for how an antitrust enforcement program in this area might proceed.

I. The General Problem

A. What’s Wrong with High Prices?

The standard antitrust/welfare economics paradigm condemns high prices at least on the grounds of resource misallocation and deadweight welfare loss. Output is reduced, resources are misdirected to less desired goods or services, and the value of the preferred goods that are not produced is lost. Many scholars go beyond the deadweight welfare loss, condemning monopoly pricing because of the redistribution of the consumer surplus from consumers to producers, but some are indifferent to this redistribution.

Although monopoly pricing has been condemned as a general matter, not everyone agrees that monopoly pricing is always bad. Some economists and courts have focused on the dynamic benefits of monopoly pricing. Monopoly pricing can incentivize innovation and investment, offering greater reward for risky endeavors. Monopoly pricing also carries with it the seeds of its own destruction, signaling firms that there are extra profits to be made if they enter. A dynamic economy might thrive on some degree of monopoly pricing, at least for some limited amount of time.

Whatever the antitrust view of high prices, there is an additional argument that can be made against high prices, but it is one to which antitrust is often indifferent. High prices can be seen as unfair in certain situations. Common discourse confirms this view—“profiteering,” “price gouging,” and “manipulation” are labels often attached to certain kinds of pricing decisions. These terms are used when sellers take advantage of the situation in which buyers find themselves, often in times of shortage or because of a particular need. For one reason or another, buyers are at the mercy of a seller that can easily take advantage of the situation to hold up the buyer and demand more for its product or service than it should be worth. Sellers can exploit buyers.

The law is rich with examples of efforts to deal with this problem of fairness, efforts that far predate the elaboration of welfare economics. The common law imposed duties of reasonable pricing on those who pursued “public” or “common callings,” such as innkeepers, carriers, ferrymen, and even surgeons. Legislation widened the group to include grain elevator operators, railroads, water companies, and the like.

This legal response to high prices has taken a number of forms beyond general common law duties or public utility regulation, of course, but I want to focus on two that show both a willingness to take on high prices in situations relevant to drug prices as well as some of the problems in doing so— post-World War I shortages and electric utility surge pricing.

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A research grant from the Filomen D’Agostino and Max E. Greenberg Research Fund at New York University School of Law provided financial assistance for this article. The author thanks Michael Carrier, William Comanor, the participants in the Department of Justice Antitrust Division’s Competition Law and Policy Seminar Series, and the New York State Bar Association Antitrust Section’s Monthly Meeting Series for their helpful comments on earlier drafts. He also thanks Leah Harrell, Geoffrey van de Walle, and Kevin Wu for their excellent research assistance.