price regulation in the pharmaceutical industry prescription or placebo president clinton and several legislators have proposed restrictions on price increases in the pharmaceutical industry similar to those on some public utilities studies however suggest that under conditions of rapidly changing demand as found in pharmaceuticals price caps could be manipulated using simulations we show that in reaction to regulation pharmaceutical firms would optimally set launch prices 50 percent higher than in an unregulated market although initially hurt after seven years consumers benefit as the unregulated price rises above the price cap thus before enacting legislation congress should assess america s willingness to pay more now for lower prices in the future

the relative importance of actual and potential competition empirical evidence from the pharmaceuticals market the relative importance of actual and potential competition empirical evidence from the pharmaceuticals market

pricing and patents of hiv aids drugs in developing countries this article provides empirical evidence on the impact of patents on drug prices across developing countries it uses sales data on human immunodeficiency virus hiv acquired immuno deficiency syndrome aids drugs in a sample of 34 low and middle income countries between 1995 and mid 2000 the main findings are that patents do shift drug prices up drug prices are correlated to per capita income levels and drug firms follow a skimming strategy when pricing new hiv aids drugs that is there is across country and intertemporal price discrimination in the global drug markets

parallel imports and the pricing of pharmaceutical products evidence from the european union we consider policy issues regarding parallel imports pis of brand name pharmaceuticals in the european union where such trade is permitted we develop a simple model in which an original manufacturer competes in its home market with pi firms the model suggests that for small trade costs the original manufacturer will accommodate the import decisions of parallel traders and that the price in the home market falls as the volume of parallel imports rises using data from sweden we find that the prices of drugs subject to competition from parallel imports fell relative to other drugs over the period 1994 1999 econometric analysis finds that parallel imports significantly reduced manufacturing prices by 12 19 there is evidence that this effect increases with multiple pi entrants

a simple model of pharmaceutical price dynamics abstract branded pharmaceutical firms use price and promotional strategy to manage public knowledge about their drugs we propose a dynamic theory of pharmaceutical pricing and conduct an exploratory empirical analysis inspired by the theory our theory predicts a pattern of increasing prices and decreasing promotional activities over a drug s life cycle prices are kept low and advertising levels high early in the life cycle in order to build public knowledge about the drug as knowledge grows prices rise and advertising falls if the management of this stock is important enough this tendency of prices to rise can overwhelm the price decreasing effect of entry by generic competitors late in the drug life cycle we argue that our theory of price dynamics explains empirical regularities in this industry

persuasion or information the economics of prescription drug advertising the economic and welfare effects of advertising have been extensively studied over the last half century however these efforts have not led to a consensus either as to the effects or the value of advertising economists continue to reach polar conclusions that appear to be derived mainly from preconceptions of the social desirability of advertising on the one hand is research that emphasizes promotion s ability to create artificial product differentiation and thereby produce informational confusion 1 this line of research stresses the empirical association of extensive advertising with high concentration and high accounting profits evidence judged to support increased market power and entry barrier effects 2 a contrary body of research emphasizes the value of advertising in providing information and hence in promoting competition 3 the empirical findings most consistent with this view are that prices paid by consumers in selected markets are lower with advertising than without it 4

patents brand generic competition and the pricing of ethical drugs in canada some empirical evidence from british columbia 1981 1994 this paper examines the impact of the 1987 changes in the canadian patent act on the pricing of ethical drugs from 1969 to 1987 canada opted to control pharmaceutical prices by using the compulsory licensing provisions of the act to promote competition between branded drugs and their generic equivalents in 1987 however the act was amended to guarantee patent holders an extended period 7 10 years of protection this reduced brand generic competition by retarding generic entry and suggests that ceteris paribus after 1987 pharmaceutical prices increased relative to pre 1987 prices this hypothesis is examined for the period 1981 1994 using a sample of 82 drugs from the british columbia pharmacare programme the major conclusions are despite evidence of significant first mover advantages which resulted in higher brand prices competition from generics succeeded in reducing overall market prices prior to 1987 but after 1987 the efficacy of generic competition was reduced and both brand and market p

a dynamic oligopoly structural model for the prescription drug market after patent expiration this article incorporates consumer learning and heterogeneity into a dynamic oligopoly model for the prescription drug market in the model both firms and patients need to learn the generic qualities via patients experiences generic firms entry decisions are endogenous but their entry timings depend on a random approval process i apply the model to examine the impact of shortening the expected generic approval time although this policy experiment brings generics to the market sooner it increases a potential entrant s likelihood of entering a crowded market and hence could reduce the total number of generic entrants and consumer welfare

r d in the pharmaceutical industry a world of small innovations it is commonly argued that in recent years pharmaceutical companies have targeted their research and development r d at small improvements of existing compounds instead of riskier drastic innovations in this paper we show that the bias in the pharmaceutical industry toward small innovations might be driven by the low sensitivity of the demand in particular small innovations get a proportionally larger reward because pharmaceutical firms target them at the inelastic segments of the demand as a consequence firms find it relatively more profitable to invest in small innovations we also study the effect on r d incentives of marketing strategies and regulatory instruments aimed at controlling pharmaceutical expenditure

strategic pricing of new pharmaceuticals this paper provides empirical evidence on the leading factors affecting the prices of new pharmaceuticals both at introduction and after 4 6 and 8 years most important is the extent of therapeutic advance embodied in a new product for drugs which represent important therapeutic gains launch prices can be two or three times those of existing drugs used for the same purposes while drugs that largely duplicate the actions of currently available products are typically priced at comparable levels in addition the number of branded substitutes has a substantial negative effect on launch prices which reflects the importance of competitive pressures duplicate products thereby play an important economic role in pharmaceutical markets

pricing profits and technological progress in the pharmaceutical industry the decades old debate over pharmaceutical industry prices profits and innovation has again intensified a number of events coalesced to refocus public interest on pharmaceuticals contributing to public concern were bureau of labor statistics price index increases for pharmaceuticals far outpacing those for the products of other industries another prominent characteristic of the pharmaceutical industry has been its extraordinarily high reported profitability this article examines the phenomena that precipitated the current pharmaceuticals debate their historical antecedents and the principal questions at issue in the author s considered judgment a pell mell march toward regulation of pharmaceutical industry pricing could seriously impair the industry s incentives for investment in new products

oligopolistic pricing with sequential consumer search n identical stores compete by choosing prices for a homogeneous good with constant marginal costs consumers search sequentially with perfect recall for the lowest price one class of consumers called shoppers have zero search costs while all other consumers have a positive search cost c there is a unique symmetric nash equilibrium price distribution with the property that it changes smoothly from marginal cost pricing when all consumers are shoppers and or c 0 and monopoly pricing when no consumers are shoppers remarkably as the number of stores increases the nash equilibrium becomes more monopolistic copyright 1989 by american economic association

regulation and pricing of pharmaceuticals reference pricing or price cap regulation we study the relationship between regulatory regimes and pharmaceutical firms pricing strategies using a unique policy experiment from norway which in 2003 introduced a reference price rp system called index pricing for a sub sample of off patent pharmaceuticals replacing the existing price cap pc regulation we estimate the effect of the reform using a product level panel dataset covering the drugs exposed to rp and a large number of drugs still under pc regulation in the time before and after the policy change our results show that rp significantly reduced both brand name and generic prices within the reference group with the effect being stronger for brand names we also identify a negative cross price effect on therapeutic substitutes not included in the rp system in terms of policy implications the results suggest that rp is more effective than pc regulation in lowering drug prices while the cross price effect raises a concern about patent protection

price regulation and relative delays in generic drug adoption abstract increasing the adoption of generic drugs has the potential to improve static efficiency in a health system without harming pharmaceutical innovation however very little is known about the timing of generic adoption and diffusion no prior study has empirically examined the differential launch times of generics across a comprehensive set of markets or more specifically the delays in country specific adoption of generics relative to the first country of generic adoption drawing on data containing significant country and product variation across a lengthy time period 1999 2008 we use duration analysis to examine relative delays across countries in the adoption of generic drugs our results suggest that price regulation has a significant effect on reducing the time to launch of generics with faster adoption in higher priced markets the latter result is dependent on the degree of competition and the expected market size

pricing patent loss and the market for pharmaceuticals dustry the drug price competition and patent term restoration act of 1984 very clearly reflects the determination of policy makers to simultaneously address issues of price control and technical progress the 1984 act increased returns to innovation by extending the period of patent protection to take into account the time between receipt of a patent and food and drug administration fda approval of a drug for sale in the market the 1984 act also reduced the testing requirements for approval of new generic brands of existing chemical entities thus reducing entry barriers in markets where patents have expired the expected outcome from eased entry conditions for generic substitutes was substantially enhanced price competition and lower prices for brand name drugs in fact prices for brand name drugs have tended to increase following entry by generics wagner and duffy 28 examined price changes for top selling generics and name brands they show substantial price increases in brand name prices accompanying large reductions in generic prices as entry of generics occurs grabowski and vernon 9 examined data on 18 major orally administered rug products subject to generic competition between 1983 and 1987 and found that the name brand price increased by an average of 7 one year subsequent to generic entry and 11 two years following generic entry

generic entry price competition and market segmentation in the prescription drug market abstract this paper studies the effects of generic entry on post patent price competition for 18 prescription drugs recently exposed to competition an independent validating test of the generic competition paradox is conducted using a newly created data set each generic entrant is associated with an average 1 increase in the branded price the one way error component model accounts for intermolecular competition market segmentation and endogeneity of entry and finds branded prices increasing by 2 alternative definitions of entry suggest that price competition is confined to the generic market the unique payer type feature of the data offers empirical evidence supporting market segmentation

durable goods price cycles theory and evidence from the textbook market i introduction one of the features of the market for new textbooks is that the price of new textbooks is relatively inflexible over the life of an edition in the sense that it fails to decline as the end of an edition approaches this inflexibility seems surprising because the availability of used textbooks which are a close substitute for new textbooks rises as the textbook ages furthermore the willingness to pay of a purchaser of a new textbook who plans to resell the book should decline at the end of the edition as the introduction of a new edition will destroy the resale value of the previous edition both of these factors would be expected to put downward pressure on the price of the good as the edition ages our goal of this article is to develop a model of textbook pricing that is capable of explaining this price inflexibility over the life of an edition we model the textbook pricing decision as that of a monopoly seller of a durable good over the life of an edition of the good where the life of the edition is exogenously given at two periods and the introduction of a new edition kills off the used market for the previous edition we assume that the market for the good is made up of two types of consumers high valuation buyers who will keep the good and low valuation buyers who value the option of being able to resell the good in the used market after using the services of the good in the current period the willingness to pay of high valuation buyers will thus be constant over the life of an edition while that of the low valuation buyers will decline in the second period due to the elimination of the used market we show that this model may lead to an optimal price for the durable good that may either rise or fall over the life of an edition and identify two effects that influence the monopolist s pricing decision the first we refer to as the used goods supply effect which is the impact of the quantity of goods available in the used market on the optimal price of new goods in the second period we show that if the quantity of high valuation buyers is sufficiently low the price of new goods may be increasing in the quantity of used goods in the second period this results from the fact that the increased supply of used goods may reduce the elasticity of demand for new goods making it optimal for the monopolist to sell only to high valuation buyers in the second period the second effect is the potential for resale effect which is due to the fact that the ability to sell goods in the used market will raise the willingness to pay of low valuation buyers relative to that of high valuation buyers in the first period the combination of these two effects leads to the possibility that the monopolist will choose to sell to both types of buyers in the first period of the edition but to sell only to high valuation buyers in the second period our empirical analysis tests for the presence of used goods supply and potential for resale effects on the prices of new textbooks we utilize a panel dataset from college bookshops that contains price and quantity information for economics textbooks for each semester between 1997 and 2003 we estimate simple pricing equations with textbook fixed effects instrumental variables are also used to account for the potential endogeneity of a regressor we find that textbook prices increase as the share of used textbooks increases which is consistent with the presence of a used good supply effect in which the increased presence of used goods makes the demand curve for new goods less elastic we also find evidence that prices of the goods are higher in the last period of an edition controlling for the stock of used goods in the market this is consistent with the potential for resale effect our theoretical model can be distinguished from other work that has analyzed the optimal pricing problem for a monopoly seller of a durable good

does regulation drive out competition in pharmaceutical markets abstract most countries regulate pharmaceutical prices either directly or indirectly on the assumption that competition is at best weak in this industry this paper tests the hypothesis that regulation of manufacturer prices and retail pharmacy margins undermines price competition we use data from seven countries for 1992 to examine price competition between generic competitors different manufacturers of the same compound and therapeutic substitutes similar compounds under different regulatory regimes we find that price competition between generic competitors is significant in unregulated or less regulated markets united states united kingdom canada and germany but that regulation undermines generic competition in strict regulatory systems france italy and japan regulation of retail pharmacy further constrains competition in france germany and italy regulation thus undermines the potential for significant savings on off patent drugs which account for a large and growing share of drug

dynamic demand for new and used durable goods without physical depreciation the case of japanese video games we develop a new dynamic demand model for new and used durable goods and quantify the impact of used goods markets on producers profits and consumer welfare

price and welfare effects of a pharmaceutical substitution reform the price effects of the swedish pharmaceutical substitution reform are analyzed using data for a panel of all pharmaceutical product sold in sweden in 1997 2007 the price reduction due to the reform was estimated to average 10 and was found to be significantly larger for brand name pharmaceuticals than for generics the results also imply that the reform amplified the effect that generic entry has on brand name prices by a factor of 10 results of a demand estimation imply that the price reductions increased total pharmaceutical consumption by 8 and consumer welfare by sek 2 7 billion annually

generics and new goods in pharmaceutical price indexes drug prices and their rate of inflation are a major focus of current policy debates on u s health care in this paper we show that where patent expiration and generic entry are significant as they are for many important classes of drugs movements in the official price indexes may be poor indicators of the actual prices paid and the resulting changes in consumer welfare when a drug goes off patent those consumers who regard the branded and generic versions as more or less perfect substitutes experience a substantial price decline and concomitant welfare gain which the current methods used by the statistical agencies fail to capture we suggest a number of alternative ways of proceeding although our computations are based on a limited number of cases they imply that the overall rate of inflation in drug prices may be quite seriously overstated while generic pharmaceuticals are the topic of our calculations the problem discussed is also of wider importance generic drugs are a special and possibly easy case

firm behavior in a market with addiction the case of cigarettes abstract this paper investigates firm behavior when demand is linked over time among other things the theoretical section shows that if firms are forward looking anticipated future events can affect current consumption of an addictive good even when consumers are completely myopic the empirical part of the paper reports a simulation of the 1983 federal cigarette excise tax increase both myopic and rational models of consumer demand give roughly the same predictions for per capita consumption but neither model does very well predicting actual consumption the problem appears to lie in the prediction of price suggesting that supply considerations are important

the price premium of generic to brand names and pharmaceutical price index the price premium of generic pharmaceuticals to brand names is examined under different competitive market situations the result of this study shows that the number market share and the age of both brand name and generic products have the most explanatory power for explaining the price premium this study further applies this method to a pharmaceutical price index in order to explain drug price index perplexities

price competition in pharmaceuticals the case of anti infectives a fundamental question in industrial organization regards the relationship between price and the number of sellers this relationship has been particularly important in the pharmaceutical industry where legislative changes were specifically designed to foster competition previous research on the pharmaceutical industry has shown generic entry has a mixed impact generic prices fall rapidly with generic entry whereas branded prices tend to increase or decrease only slightly using more complete data focused on one segment of the pharmaceutical industry anti infectives we find that the relationship between pharmaceutical prices and the number of sellers is more like that found in other industries jel l11 l65 d4

the distortionary effects of government procurement evidence from medicaid prescription drug purchasing in 2003 the federal state medicaid program provided prescription drug coverage to more than 50 million people to determine the price that it will pay for each drug medicaid uses the average private sector price when medicaid is a large part of the demand for a drug this creates an incentive for its maker to increase prices for other health care consumers using drug utilization and expenditure data for the top 200 drugs in 1997 and in 2002 we investigate the relationship between the medicaid market share mms and the average price of a prescription our estimates imply that a 10 percentage point increase in the mms is associated with a 7 to 10 percent increase in the average price of a prescription in addition the medicaid rules increase a firm s incentive to introduce new versions of a drug in order to raise price we find empirical evidence that firms producing newer drugs with larger sales to medicaid are more likely to introduce new versions taken together our findings suggest that government procurement rules can alter equilibrium price and product proliferation in the private sector

a study of innovation in the pesticide industry analysis of the innovation record of an industrial sector abstract this is a study of innovation in pesticides from 1930 to 1980 innovation output indicators used are product innovation and patent counts innovations are evaluated in terms of originality and market success market demand is measured by the value of sales per year at constant prices the distribution of these indicators over the 50 year period is compared and contrasted to the historical development of the sector a number of hypotheses are proposed regarding the dynamics of the process of innovation notably the importance of market successful radical innovations as driving forces the central role of large research intensive companies the interplay between basic and applied research and the effects of corporate technological traditions lastly the potential and some limitations in the use of patents as innovation output indicators are described

the effect of inertia on brand name versus generic drug choices abstract consumers tendency to repurchase products is called inertia this study investigates inertia in brand name and generic drug choices which is manifested by the slow and limited adoption of generic drugs despite their lower prices we use claims data from japan and focus on the generic entry of a widely prescribed lipid lowering drug pitavastatin observing the periods before and after the generic entry gives us a unique opportunity to identify the effect of inertia we construct a choice model that incorporates price heterogeneous brand preferences and inertia to quantify each component s magnitude we find that both inertia and heterogeneity in brand preferences have substantial effects counterfactual simulations suggest that a nudging policy that removes inertia from previous brand name users such as by alerting the patients to switch to cheaper generic drugs may have substantial effects and enable patients to choose optimally

the political economy of the pharmaceutical industry e conomicsis a practical science since its inception as an independent discipline it has probed the major policy issues of the day the topics that aroused the interests of its practitioners have generally been those that presented government officials with critical choices the modern literature on the economics of the pharmaceutical industry is no exception this body of material originated with the investigations of the kefauver committee in late 1959 public interest was aroused by the spectacle of confrontation between committee and industry the record made by this committee and its successors grew to tens of thousands of pages as claims and counterclaims were offered regarding industry conduct and performance the primary line of attack concerned pharmaceutical prices and profits the committee demonstrated that prices generally exceeded direct costs of manufacturing for 22 major pharmaceutical firms in 1958 costs of goods sold were merely 32 percent of total sales u s senate report 1961 p 31 the committee argued that this fact alone demonstrated the presence of monopoly power while the substantial difference between revenues and production costs permitted high expenditures on research and development it also paid for even higher selling outlays moreover reported rates of return after taxes during this period on the order of 21 to 22 percent exceeded twice the average for all manufacturing the industry replied that on the contrary prices were low relative to the value afforded consumers and high returns on successful products were required to balance the losses from the large numbers of unsuccessful ones the relevant concept of marginal costs according to the industry position must include the costs of developing and marketing new products and therefore prices were not excessive at all although it admitted earning substantial profits the industry argued that without these returns research outlays would be limited and the number of new drugs reduced the committee countered that little of social value arose from industry research molecules were manipulated and the new drugs that resulted were therapeutically similar to those already on the market indeed it suggested that much