Pharmaceutical Benefits Managers or PBM's are intermediaries between upstream drug manufacturers and downstream insurance companies. They design formularies (list of drugs that insurance will cover) and negotiate prices with drug companies. PBM's want a wider variety of drugs available to their insured populations, but at low prices. Suppose that they are negotiating with two non-drowsy allergy drugs, Claritin and Allegra, for inclusion on the formulary. The "value" or "surplus" created by including one non-drowsy allergy drug on the formulary is $100, but the value of the second drug is only $30.
a. What's the likely bargaining negotiation outcome if the PBM bargains by telling each drug company that they are going to reach agreement with the other drug company?
b. Now suppose the two drug companies merge. What is the likely post-merger bargaining outcome?