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Optimal price regulations in international pharmaceutical markets with generic competition

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  • Geng, Difei
  • Saggi, Kamal

Abstract

In a two-country (home and foreign) model in which the home producer of a branded pharmaceutical product faces generic competition in each market, we analyze home's optimal policy choices regarding two major types of price regulations: external reference pricing (ERP) and direct price controls. Home's nationally optimal ERP policy lowers domestic price while maintaining the firm's export incentive. This ERP policy results in a negative international price spillover that the foreign country can (partly) offset via a local price control. Generic competition in either market reduces home's welfare gain from instituting an ERP policy. Weaker competition abroad or a greater weight on firm profits relative to consumer surplus in home's welfare function makes it more likely that home prefers an ERP policy to a price control. While international integration of national generic markets can improve welfare, such is not the case if it causes home to relax its ERP policy.

Suggested Citation

  • Geng, Difei & Saggi, Kamal, 2020. "Optimal price regulations in international pharmaceutical markets with generic competition," Journal of Health Economics, Elsevier, vol. 71(C).
    • Handle: RePEc:eee:jhecon:v:71:y:2020:i:c:s0167629619303844
    DOI: 10.1016/j.jhealeco.2020.102315
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    More about this item

    Keywords

    External reference pricing policies; Price controls; Generic competition; Exporting; Welfare;
    All these keywords.

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • O34 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Intellectual Property and Intellectual Capital
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly

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