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Reconciling social and industrial goals: a bargaining model to pricing pharmaceuticals

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Abstract

The issues at stake for determining the price of a drug are related to finding an "equitable" trade-off between the legitimate need for the pharmaceutical industry to make a profit and full exploitation of the consumer’s surplus in a market with asymmetry of information. This paper develops a bargaining process where the regulator sets the price of drug in order to maximise the society’s net benefit while the pharmaceutical industry maximises its profit. The resulting price is a weighted average of willingness to pay and cost of the new drug. The weights are represented by the relative strength of the two actors which we show to depend on the importance of the drug for society (other alternatives on the market, the degree of innovation and effectiveness), and on the sustainability of the threat by the pharmaceutical industry to sell the drug only on the private market (medicaments not reimbursed by public healthcare system). Our proposed method allows to set the price of new drugs in different market contexts, i.e. where less effective alternatives are already sold or in new therapeutic areas. Keywords: Pharmaceutical Industry, Regulation, Health Care

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Paper provided by Cattaneo University (LIUC) in its series LIUC Papers in Economics with number 170.

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Length: 16 pages
Date of creation: May 2005
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Handle: RePEc:liu:liucec:170

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  1. Danzon, Patricia M & Chao, Li-Wei, 2000. "Does Regulation Drive out Competition in Pharmaceutical Markets?," Journal of Law and Economics, University of Chicago Press, vol. 43(2), pages 311-57, October.
  2. Danzon, Patricia M. & Towse, Adrian, 2003. "Differential Pricing for Pharmaceuticals: Reconciling Access, R&D and Patents," Working paper 258, Regulation2point0.
  3. Wright, Donald J., 2004. "The drug bargaining game: pharmaceutical regulation in Australia," Journal of Health Economics, Elsevier, vol. 23(4), pages 785-813, July.
  4. 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.
  5. DiMasi, Joseph A. & Hansen, Ronald W. & Grabowski, Henry G., 2003. "The price of innovation: new estimates of drug development costs," Journal of Health Economics, Elsevier, vol. 22(2), pages 151-185, March.
  6. Silvia M. Ess & Sebastian Schneeweiss & Thomas D. Szucs, 2003. "European Healthcare Policies for Controlling Drug Expenditure," PharmacoEconomics, Springer Healthcare | Adis, vol. 21(2), pages 89-103.
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