Many markets exhibit vertical layers with successive monopolists. One rationale for the existence of large middlemen is their ability to exercise countervailing market power to upstream monopolists. However, having market power may also inhibit middlemen's incentive to act in the interest of consumers. In this work, I study the trade-off between countervailing market power and agency frictions in the US drug market. Pharmacy benefit managers (PBMs) are large middlemen who negotiate with drugmakers on behalf of insurers for rebates, which may inflate list prices – sticker prices set by drugmakers – and make drugs less affordable. At the same time, high rebates may benefit consumers through lower insurance costs. To assess the role of PBMs, I estimate a vertical model of drug and insurance demand, rebate negotiation and list price setting for oral anticoagulants in Medicare Part D. I find that PBMs are effective at leveraging countervailing market power in holding down costs for smaller insurers. Policy solutions to remove the agency problem while preserving, or even enhancing, countervailing market power would improve welfare, though the magnitude of improvement depends on how much consumers are currently benefiting from rebates.

The final delivery of many products depends in part on intermediaries who bargain with upstream manufacturers and then sell reduced-price product bundles to retailers downstream. In health care, pharmacy benefit managers (PBMs) fill a crucial role in the supply chain for drugs by creating drug formularies that include drugs in bundle that is sold to insurers downstream. We study the role of vertical integration between pharmacy benefit managers and insurers in driving access to drugs. Vertical integration allows the two integrated parties to share the rents accrued from the PBM's upstream bargaining effort, eliminating double marginalization and aligning incentives between these suppliers. However, this integration can also have anticompetitive effects, inducing the PBM to be less willing to deal with rival insurers, passing through a lesser portion of the accrued rebates. We study this empirically in the context of Medicare Part D, the public prescription drug insurance program for seniors. We develop a model of the industry, and use it to empirically to study the impacts of vertical integration. We find that consumers place a higher revealed value on premium reductions than cost savings due to drug tiering. Vertical integration does lead to integrated PBMs raising rivals' costs, but by a small amount because rival insurers can ultimately substitute to backup formularies at cheaper costs.

This paper evaluates the social value of investing in vaccine research, development, and manufacturing capacity for pandemic preparedness and response. Rapid vaccination during pandemics can significantly reduce mortality, economic losses, and societal disruptions. However, vaccine manufacturers often lack sufficient incentives for speed and capacity expansion. Strategic policies by governments and international organizations could enhance these incentives and improve equitable vaccine distribution.