The aim of this article is to analyze the relationship between drug price and drug quality and how it varies across two of the most common regulatory regimes in the pharmaceutical market: Minimum Efficacy Standards (MES) and Price Controls (PC). We develop a model of adverse selection where a pharmaceutical company can charge different prices to a heterogeneous group of buyers for its (innovative) drug, and we evaluate the properties of the equilibria under the two regimes. We model consumer heterogeneity stemming from differences in the willingness-to-pay for drug quality, measured through ex-post efficacy. The theoretical analysis provides two main results. First, the average drug quality delivered is higher under the MES regime than in the PC regime or a in combination of the two. Second, PC regulation reduces the difference in terms of high-low quality drug prices. The empirical analysis based on Italian and US data corroborates these results.
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Paper provided by Tor Vergata University, CEIS in its series CEIS Research Paper with number
138.
Length: 31 pages Date of creation: 16 Dec 2008 Date of revision:
16 Dec 2008 Handle: RePEc:rtv:ceisrp:138
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Find related papers by JEL classification: I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets O31 - Economic Development, Technological Change, and Growth - - Technological Change - - - Innovation and Invention: Processes and Incentives G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
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