Although the benefits of centralization are obvious, the issue is whether centralization should go as far as monopoly, and what the status of procurement agencies should be.
A geographical monopoly exists when only one body procures drugs in a given geographical area, such as a country. A sectoral monopoly exists when only one body purchases drugs to be dispensed by a particular group of outlets, such as public clinics, private pharmacies or the health services of religious missions.
In theory a monopoly obtains the greatest possible savings for the group it serves. A monopolistic body conducts activities on a larger scale than do other bodies, and the larger the amounts transacted, the lower certain unit costs may be. But monopoly is not always efficient, because yields do not increase in linear relation to size, and because monopoly does carry risks of abuse.
Monopoly and economies of scale
Savings do not always increase in proportion to the size of the monopoly. Negotiated prices may decrease marginally with decreases becoming successively smaller as the size of the monopoly increases. For example, substantial price decreases may be achieved by moving from size 1 to size 100, but very little price decrease may be achieved between size 100 and size 500. Moreover, large organizations sometimes have substantial running costs due to problems of internal coordination; this coordination is often less costly in smaller organizations. When there are no economies of scale, it is better to have competing organizations to help prevent monopoly abuse. The fewer the purchasers, the more easily they dominate the market rather than being regulated by it.
The size of a country influences the effectiveness of a monopoly, as size affects the scope for economies of scale. The smaller a country’s consumption of drugs, the more a national monopoly is of interest. The logistics of distribution also relate to this issue. Thus where distribution costs are minimized by a monopoly in rural areas, it is possible to have a single organization for the rural areas and competing organizations in the big cities.
Monopoly and strategic behaviour
The economies of scale achieved by a monopoly cannot be redistributed to society as a whole if they are confiscated by the monopoly body. Procurement therefore needs to be controlled in order to prevent abuse and to achieve desired social goals.
Administrative control of a monopoly may be exercised by supervisory bodies or by courts whose jurisdiction extends to procedures such as tendering. However, administrative control that puts too much emphasis on formal procedures may lose sight of the overall social objectives. These procedures can be distorted and become ineffective.
Political control may be exercised through the appointment of directors of the monopoly. Although the direct cost of this method is virtually nil, if the directors do not protect social goals it may result in considerable indirect cost.
A central procurement agency may be controlled by its users, such as hospitals and health services. If this control is real and effective, this method is in principle the best form of control as users have a direct stake in the proper functioning of the agency.
In contrast to monopoly, reliance on competition alone can have severe drawbacks. It is likely to focus only on price, and may neglect requirements for quality and regular supply, which may not be controllable by the many small procurement bodies. Limiting the number of bodies makes control easier. Intermediate situations between monopoly and pure competition (duopoly if there are two buyers or oligopoly if there are several buyers) generally enable a balance to be reached between the advantages and drawbacks of these two extremes.
The centralization of procurement, generally in the framework of a monopoly, has some important advantages. In order for these advantages to benefit the general interest, the monopoly should be controlled by a combination of political and administrative procedures in a mix that will depend on the context and history of each country.