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The Determinants of Pricing in Pharmaceuticals: Are U.S. prices really so high?

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Author Info
Antonio Cabrales
Sergi Jiménez-Martín

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Abstract

This paper studies price determination in pharmaceutical markets using data for 25 countries, six years and a comprehensive list of products from the MIDAS IMS database. A key finding is that the U.S. has prices that are not significantly higher than those of countries with similar income levels, specially those that are "lightly regulated". More importantly, price differences to the US levels increase for "branded" or innovative products, and decrease, regardless of the level of regulation for mature or widely diffused molecules. In addition, the nationality of the producer appears to have a small and often in significant impact on prices. We have constructed a theoretical model that accounts for all these findings simultaneously. One interesting aspect of the model is that it shows that reference pricing confers a degree of protection against government intervention. Thus, there is a sense in which a reference price (or similar) policy in one country becomes a “commitment device to avoid lowering price in another one.

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Paper provided by FEDEA in its series Working Papers with number 2008-18.

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Date of creation: May 2008
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Handle: RePEc:fda:fdaddt:2008-18

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  1. Gambardella, Alfonso & Orsenigo, Luigi & Pammolli, Fabio, 2000. "Global Competitiveness in Pharmaceuticals: A European Perspective," MPRA Paper 15965, University Library of Munich, Germany. [Downloadable!]
  2. 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. [Downloadable!] (restricted)
  3. Richard G. Frank & David S. Salkever, 1997. "Generic Entry and the Pricing of Pharmaceuticals," NBER Working Papers 5306, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Danzon, Patricia M & Chao, Li-Wei, 2000. "Does Regulation Drive out Competition in Pharmaceutical Markets?," Journal of Law & Economics, University of Chicago Press, vol. 43(2), pages 311-57, October.
  5. Beatriz Domínguez & Juan José Ganuza & Gerard Llobet, 2005. "R&D in the Pharmaceutical Industry: A World of Small Innovations," Economics Working Papers 936, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
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  6. Mark Duggan & Fiona Scott Morton, 2004. "The Distortionary Effects of Government Procurement: Evidence from Medicaid Prescription Drug Purchasing," NBER Working Papers 10930, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. 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. [Downloadable!] (restricted)
  8. Scherer, F.M., 2000. "The pharmaceutical industry," Handbook of Health Economics, in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 25, pages 1297-1336 Elsevier. [Downloadable!] (restricted)
  9. Charles A. Holt & David T. Scheffman, 1987. "Facilitating Practices: The Effects of Advance Notice and Best-Price Policies," RAND Journal of Economics, The RAND Corporation, vol. 18(2), pages 187-197, Summer. [Downloadable!] (restricted)
  10. Iain M. Cockburn & Aslam H. Anis, 1998. "Hedonic Analysis of Arthritis Drugs," NBER Working Papers 6574, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Arbatskaya, Maria & Hviid, Morten & Shaffer, Greg, 2004. "On the Incidence and Variety of Low-Price Guarantees," Journal of Law & Economics, University of Chicago Press, vol. 47(1), pages 307-32, April.
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  12. Ernst R. Berndt & Robert S. Pindyck & Pierre Azoulay, 1999. "Network Effects and Diffusion in Pharmaceutical Markets: Antiulcer Drugs," NBER Working Papers 7024, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  13. Richard G. Frank & David S. Salkever, 1997. "Generic Entry and the Pricing of Pharmaceuticals," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 6(1), pages 75-90, 03. [Downloadable!] (restricted)
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