MUTUAL FORBEARANCE IN THE INDIAN PHARMACEUTICAL INDUSTRY: STRATEGIC RESPONSES TO PRICE-CAP REGULATION INDUCED MARKET ASYMMETRIES AND THE ROLE OF MULTIMARKET CONTACT

The present study examines the effect of multimarket contact (MMC) on regulation-induced strategic firm behavior. Throughout the literature, multimarket contact has been argued to create a condition of collectively reduced rivalry generally referred to as mutual forbearance. This collusive behavior is theorized to arise when asymmetries are present in either markets, firms, or products (Bernheim & Whinston, 1990). The current study considers the Indian price-cap regulation on essential medicines (DPCO 2013) to cause market asymmetries in terms of regulated and unregulated dosage markets. While this regulation has been confirmed to instigate price coordination (Bhaskarabhatla, Chatterjee, Anurag, & Pennings, 2016), the role of multimarket contact has remained unaddressed. Based on the model developed by Bernheim and Whinston (1990) and recent empirical work (Bowers, Greve, Mitsuhashi, & Baum, 2014), it is expected that MMC further induces collusive behavior. Using data from the Indian pharmaceutical industry on two medicines (Metformin and Cefixime), the strategic use of pricing behavior (wholesale- as well as retail prices) and promotional behavior (provision of bonus units) in response to DPCO 2013 is investigated. The results indicate collusive behavior to exist in the form of price coordination for Metformin and a combined strategic pricing and promotional strategy for Cefixime. This behavior is found to be specifically prevalent in regulated dosage markets and generally reinforced by high levels of MMC. Moreover, collusion is more prominent in the period leading up to the regulation and particularly visible among large firms. To sum up, these findings confirm the previous literature and present a unique new study in the research area of multimarket contact and mutual forbearance.