The Areeda-Turner rule in U.S. antitrust jurisprudence limits successful predatory pricing cases to circumstances where prices can be shown to have been set below marginal costs. While not cast so, the rule reflects the view that predatory pricing is rarely attempted; and even where attempted is rarely successful; and even where attempted and successful, is difficult to identify. In this paper, we examine the theoretical and empirical foundations of this rule, and conclude that it is time to demote the Areeda-Turner analysis from the status of a rule to that of a potentially useful form of inquiry in predatory pricing litigation, but one which is neither necessary nor dispositive.

Objectives

Cost-effectiveness analysis of branded pharmaceuticals presumes that both cost (or price) and marginal effectiveness levels are exogenous. This assumption underlies most judgments of the cost-effectiveness of specific drugs. In this study, we show the theoretical implications of letting both factors be endogenous by modeling pharmaceutical price setting with and without health insurance, along with patient response to the prices that depend on marginal effectiveness. We then explore the implications of these models for cost-effectiveness ratios.

Methods

We used simple textbook models of patient demand and pricing behavior of drug firms to predict market equilibria in the drug and insurance markets and to generate calculations of the cost-effectiveness ratios in those settings.

Results

We found that ratios in market settings can be much different from those calculated in cost-effectiveness studies based on exogenous prices and treatment of all patients at risk rather than those who would demand treatment in a market setting. We also found that there may be considerable similarity in these market cost-effectiveness ratios across different products because drug firms with market power set profit-maximizing prices.

Conclusions

We found that market cost-effectiveness ratios will always indicate an excess of benefits over cost. Insurance will lead to less favorable ratios than without insurance, but when insurers bargain with drug firms, rather than taking their prices as given, cost-effectiveness ratios will be more favorable.