Competition in Atomistic and Oligopsonistic Markets: The South African Pharmaceutical Industry

• DOI: http://doi.org/10.1111/j.1813-6982.1985.tb00986.x
• Author: W. D. REEKIE*,D. R. SCOTT
• Published date: 01 March 1985
• Date: 01 March 1985

Competition in Atomistic and Oligopsonistic Markets: The South African

Pharmaceutical Industry

D. R. SCOTT AND W. D. REEKIE *(1)

THIS PAPER EXAMINES the level of competition in the South African pharmaceutical industry. The Industry operates in two

distinct market segments: the private and the state. The two are respectively atomistic and oligopsonistic in structure. The former

accounts for 66 per cent of industry sales by value and 40 per cent by volume, while in the latter segment the proportions are

reversed (PCMA, 1981, p. 22).

Given these characteristics and also the fact that the industry is commonly regarded as research based and highly innovative a

number of hypotheses are suggested:

(a) static measures of competition which ignore innovation will not be perfectly correlated with dynamic measures of competition;

(b) firms cannot long maintain market dominance in an innovative environment;

(c) when firms are faced with price sensitive oligopsonistic buyers the product range offered will be narrower, product

differentiation will be of less consequence, hence demand will be concentrated on fewer firms and so market concentration on the

supply side will be higher;

(d) where purchasing policies are on a tender bid ('winner-takes-all') basis as in the provincial market, loss of market position over

time will be even more dramatic than under conventional Schumpeterian innovative competition.

These, and related hypotheses are examined in the remainder of the paper. In Section 1 we expand briefly on some aspects of the

S.A. drug industry, both on its demand and supply sides. In Section 2 we examine the level of competition on the supply side of the

private market, both at a point in time and over time, while in Section 3 we contrast this with the position in the provincial market

and highlight how demand side differences can influence supply side levels and types of

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competition. The consequences of oligopsony buying are seen to be at odds with some government policies regarding industrial

market structure and performance and yet consistent with others. Finally, in Section 4 we summarize the implications of the paper

and suggest possible ways of escape from the policy dilemma.

1 The South African Drug Industry

This paper relates to the ethical pharmaceutical industry (that is medicines which are available only on prescription and advertised

exclusively to the medical profession). The data used in the study were restricted to prescriptions dispensed directly through

pharmacies (the private market) and those dispensed through provincial hospitals and clinics (the provincial market). Thus ethical

medicines sold by the industry to dispensing doctors, to the Central Medical Supplies (e. g. the military), and to Transmed

(formerly the railways medical aid scheme) were excluded.

In the private market there are some 5 000 prescribing doctors who select drugs on behalf of their patients. The drug costs of

patients are generally covered by private Medical Aid Schemes who reimburse on a first rand basis. That is, patients are reimbursed

in totality (or very nearly so) for pharmaceutical expenditures. There is no compulsory minimum limit which must be paid by the

insured before cover commences. This system of third party reimbursement implies that neither doctors nor patients will feel the

need to be particularly price conscious. (Although evidence exists that some price sensitivity will none the less exist (Reekie,1978)).

In a situation where price elasticity is low, quality elasticity can be expected to be relatively high. In such circumstances, and given

the high levels of Research and Development (R & D) expenditures in the industry (whether in the RSA or in the overseas parent

companies of RSA subsidiaries) then a high level of product innovation is to be expected and so we would exp ect hypotheses (a)

and (b) above not to be invalidated.

These characteristics contrast with the provincial market where pharmaceuticals are bought in bulk by the four main provincial

authorities (the Cape, Natal, the Orange Free State and the Transvaal) for use in hospitals and community clinics. Companies obtain

business by tender bidding for rights of supply.

Third party reimbursement is not present and it is well known that government is explicitly concerned with pharmaceutical cost

containment. The market is consequently relatively price sensitive and, by inference from the Dorfman-Steiner theorem, R & D

expenditures and consequential product differentiation will be less. In a variation of the Dorfman-Steiner theorem, Koutsoyiannis

(1982, p. 86) proves this as follows:

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in profit maximizing equilibrium

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