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Price Discrimination for Pharmaceuticals: Welfare Effects in the US and the EU

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  • Patricia Danzon

Abstract

Standard analysis of the welfare effects of price discrimination for pharma-ceuticals (Scherer, F.M., "How US Antitrust Can Go Astray: The Brand Name Prescription Drug Litigation", International Journal of Business and Economics, 1997, 4, 3, 000-000) is incomplete because it presumes the optimality of marginal cost pricing, ignoring the sunk costs of R&D. Pharmaceutical R&D is a global joint cost of serving all consumers worldwide; it accounts for roughly 30% of total costs. Ramsey pricing principles imply that differential pricing related to inverse demand elasticities is the second best optimal strategy to cover the joint costs. Actual price differentials to managed care customers in the US should roughly approximate Ramsey optimal differentials, in the absence of legal constraints. In the European Union (EU), traditional price differentials between countries are being undermined by parallel trade and regulation based on foreign prices. This break down of market segmentation leads manufacturers to adopt uniform prices EU-wide. Efficiency and distributive effects of such policies are probably negative. Monopsony is a more serious problem in the EU, hence actual price differentials may exceed Ramsey optimal differences. Confidential contracts between manufacturers and governments, including rebates off a common list price, would preserve ex post price differentials and should be consistent with EU law

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal International Journal of the Economics of Business.

Volume (Year): 4 (1997)
Issue (Month): 3 ()
Pages: 301-322

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Handle: RePEc:taf:ijecbs:v:4:y:1997:i:3:p:301-322

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Web page: http://www.tandfonline.com/CIJB20

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Web: http://www.tandfonline.com/pricing/journal/CIJB20

Related research

Keywords: Pharmaceutical industry; Price discrimination; Ramsey pricing; Antitrust policy; Parallel trade; Regulation; JEL classifications: L41; L51; L65; 111; K21;

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Cited by:
  1. Vincenzo Atella & Jay Bhattacharya & Lorenzo Carbonari, 2008. "Pharmaceutical industry, drug quality and regulation. Evidence from US and Italy," CEIS Research Paper 138, Tor Vergata University, CEIS, revised 16 Dec 2008.
  2. Drusilla K. Brown & George Norman, 2004. "Optimal Intellectual Property Rights Protection and Humanitarian Assistance during and International Health Emergency," Discussion Papers Series, Department of Economics, Tufts University 0416, Department of Economics, Tufts University.
  3. Valérie Paris & Christine de Mazières, 2004. "La régulation de l’industrie pharmaceutique," Revue d'Économie Financière, Programme National Persée, vol. 76(3), pages 241-265.
  4. Ebenezer Tetteh, 2009. "Implementing differential pricing for essential medicines via country-specific bilateral negotiated discounts," Applied Health Economics and Health Policy, Springer, vol. 7(2), pages 71-89, June.
  5. Patricia M. Danzon & Adrian K. Towse & Jorge Mestre-Ferrandiz, 2012. "Value-Based Differential Pricing: Efficient Prices for Drugs in a Global Context," NBER Working Papers 18593, National Bureau of Economic Research, Inc.
  6. Berndt, Ernst R. & Newhouse, Joseph P., 2010. "Pricing and Reimbursement in U.S. Pharmaceutical Markets," Working Paper Series rwp10-039, Harvard University, John F. Kennedy School of Government.
  7. Brown, Drusilla K. & Norman, George, 2012. "Optimal intellectual property rights protection during an international health emergency," Regional Science and Urban Economics, Elsevier, vol. 42(6), pages 1009-1016.
  8. Drusilla K. Brown & George Norman, 2003. "Optimal Intellectual Property Rights Exhaustion and Humanitarian Assistance during a National Health Emergency," Discussion Papers Series, Department of Economics, Tufts University 0314, Department of Economics, Tufts University.
  9. Patricia M. Danzon & Eric L. Keuffel, 2013. "Regulation of the Pharmaceutical-Biotechnology Industry," NBER Chapters, in: Economic Regulation and Its Reform: What Have We Learned?, pages 407-484 National Bureau of Economic Research, Inc.
  10. Danzon, Patricia M. & Chao, Li-Wei, 2000. "Cross-national price differences for pharmaceuticals: how large, and why?," Journal of Health Economics, Elsevier, vol. 19(2), pages 159-195, March.
  11. Dixit, Ashutosh & Braunsberger, Karin & Zinkhan, George M. & Pan, Yue, 2005. "Information technology-enhanced pricing strategies: managerial and public policy implications," Journal of Business Research, Elsevier, vol. 58(9), pages 1169-1177, September.
  12. Rutger Daems & Edith Maes, 2014. "Global Pharmaceutical Management: Building a Fair Pricing Policy," Working Papers 2014/05, Maastricht School of Management.
  13. Monika Riedel, 1998. "Konsequenzen der EU-Integration für das österreichische Gesundheitswesen," Wirtschaft und Gesellschaft - WuG, Kammer für Arbeiter und Angestellte für Wien, Abteilung Wirtschaftswissenschaft und Statistik, vol. 24(4), pages 503-522.
  14. Braouezec, Yann, 2012. "Customer-class pricing, parallel trade and the optimal number of market segments," International Journal of Industrial Organization, Elsevier, vol. 30(6), pages 605-614.
  15. Patricia M. Danzon & Andrew W. Mulcahy & Adrian K. Towse, 2011. "Pharmaceutical Pricing in Emerging Markets: Effects of Income, Competition and Procurement," NBER Working Papers 17174, National Bureau of Economic Research, Inc.
  16. Stefan Felder & Anja Olbrich, 2009. "Dealing with Excessive Off-label Drug Use: Liability vs. Patent Prolongation," Ruhr Economic Papers 0114, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.

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