tendency for forward integration of drug manufacturers with pharmacies 5

Tendency for forward integration of drug

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tendency for forward integration of drug manufacturers with pharmacies. 5. Conclusion Vertical integration allows Bulgarian pharmaceutical firms to achieve scale economies and reduce transaction costs. Operating in a high-transaction cost sector and economy, manufacturers are vulnerable to the risks of market contracting and opportunism from distributors. In their attempt to control products all along the marketing channel, they resort to complex legal and accounting manoeuvres through the mechanism of franchising. Common ownership guarantees common supply, common advertising strategy, low cost and ultimately, low prices of 16
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medications. Vertically integrated structures also provide for full control over the financial flows and the movement of drugs along the distribution chain. Integration into wholesale and retail distribution would allow fair competition and quality commitment. Forward integration into wholesaling is especially important for products that need coordination of marketing and distribution. Such is the case of non-generic (branded) drugs, which require special ways of selling. For products and industries where product differentiation is essential the need for proper advertising as part of the promotion mix also determines ownership of wholesaling, as illustrated by the Bulgarian drug market. Forward integration into retailing extends the case of ownership of distribution where special handling and proper representation of the product continue to be important to the sales of the product. Some solutions and medications are nondurable and require special storage and handling. This also necessitates the common ownership of assets – from the production stage to the sale to the final consumer. The specificity of medicines as intermediate products is very high. They are sophisticated products that require information, special demonstration or proper display. Product specificity opens pharmaceutical firms to various market risks. The need to provide detailed information to consumers also determines the ownership of retail stores by producers and a strongly forward integrated Bulgarian pharmaceutical sector. Furthermore, the freedom of distributors to use pricing strategies that do not quite match the pricing philosophy or requirements of the producers illustrates the hold-up problem where producers do not have choice but to obey distributors. Some economic theories charge vertical integration with the attempt to create monopoly and seek rents but on the Bulgarian pharmaceutical market the competition on the generic and the original drug market rules out monopoly, as there are several major producers and the sector rather resembles an oligopolistic industry. This excludes the possibility of monopoly-raised production prices. Instead, it could be expected that efficiency and cost savings resulting from vertical integration would likely reduce prices of medicines. Efficiency would stem both from savings in production and transaction costs where we showed that high degree of asset specificity, in this case, the product specificity of medicines, favors internal organization rather than market contracting.
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