This thesis aims to deliver an accurate description of the different components of the Pharmaceutical Benefits Scheme (PBS), along with an analysis of some of the elements that are specific to the bargaining dynamic between pharmaceutical companies and pharmacies. The main potential finding within this thesis is what determines the division of surplus between the players on the assumption that the pharmacy is the first to make an offer. Three exogenous variables, the PBS price of a drug, the number of pharmacies close by and the number of substitutes for a drug are assumed to determine the surplus, and the same three variables are used to model the bargaining discount rates. The Envelope Theorem is then applied to isolate the effects of independent changes in the parameters on the proportion of the surplus accrued by each player.
The relationship between pharmacies and drug companies has been modeled as an alternating offer game and the effect of a change in each individual variable on the share of the surplus accrued by the pharmacy has been recorded. It was found that the price of a PBS drug has a positive effect on the share of surplus received by the pharmacy, the number of pharmacies near by has a negative impact, while the number of substitutes is positively related to the accrued surplus by the pharmacy. The description of the PBS system, including the incentives faced by all involved parties (patients, doctors, pharmacies, drug companies and the Government) might be of wider interest beyond the Australian context, given the prevalence of drug subsidy systems in OECD countries. Such a description does not seem to exist in the Australian public arena.