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The strategic interaction between firms and formulary committees: effects on the prices of new drugs

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  • García-Alonso, M. D. C.
  • Garcia-Marinoso, B.

Abstract

We study the strategic interaction between the pricing decisions of a pharmaceutical firm and the reimbursement decisions of a government agency which grants reimbursement rights to patients for whom new drugs are most cost-effective. If the reimbursement decision precedes pricing, the agency only reimburses some patients if the drug's private and public health benefits diverge. This is, there are consumption externalities and the variable cost of the drug exceeds the alternative's. Contrarily, if the firm can commit to a price before reimbursement, a strategic effect implies that by setting a sufficiently high price, the firm can make the agency more willing to reimburse than without commitment.

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Bibliographic Info

Paper provided by Department of Economics, City University London in its series Working Papers with number 07/16.

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Date of creation: 2007
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Handle: RePEc:cty:dpaper:07/16

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Postal: Department of Economics, Social Sciences Building, City University London, Whiskin Street, London, EC1R 0JD, United Kingdom,
Phone: +44 (0)20 7040 8500
Web page: http://www.city.ac.uk
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  1. Joan-Ramon Borrell, 2003. "Drug Price Differentials Caused by Formularies and Price Caps," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 10(1), pages 35-48.
  2. Antonio Cabrales, 2003. "Pharmaceutical generics, vertical product differentiation and public policy," Economics Working Papers 662, Department of Economics and Business, Universitat Pompeu Fabra.
  3. Francis, Peter J., 1997. "Dynamic epidemiology and the market for vaccinations," Journal of Public Economics, Elsevier, vol. 63(3), pages 383-406, February.
  4. Carl Shapiro, 1983. "Optimal Pricing of Experience Goods," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 497-507, Autumn.
  5. Schmalensee, Richard, 1982. "Product Differentiation Advantages of Pioneering Brands," American Economic Review, American Economic Association, vol. 72(3), pages 349-65, June.
  6. Laux, Fritz L., 2000. "Addiction as a market failure: using rational addiction results to justify tobacco regulation," Journal of Health Economics, Elsevier, vol. 19(4), pages 421-437, July.
  7. Bagwell, Kyle & Riordan, Michael H, 1991. "High and Declining Prices Signal Product Quality," American Economic Review, American Economic Association, vol. 81(1), pages 224-39, March.
  8. Olmstead, Todd & Zeckhauser, Richard, 1999. "The menu-setting problem and subsidized prices: drug formulary illustration," Journal of Health Economics, Elsevier, vol. 18(5), pages 523-550, October.
  9. Z. John Lu & William S. Comanor, 1998. "Strategic Pricing Of New Pharmaceuticals," The Review of Economics and Statistics, MIT Press, vol. 80(1), pages 108-118, February.
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Cited by:
  1. Rajat Acharyya & Maria D.C. Garcia-Alonso, 2010. "Income Based Price Subsidies and Parallel Imports," Studies in Economics 1008, Department of Economics, University of Kent.
  2. Rajat Acharyya & Maria D.C. Garcia-Alonso, 2008. "Income-Based Price Subsidies, Parallel Imports and Markets Access to New Drugs for the Poor," Studies in Economics 0820, Department of Economics, University of Kent.

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