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Pharmaceutical industry, drug quality and regulation. Evidence from US and Italy

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Abstract

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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Bibliographic Info

Paper provided by Tor Vergata University, CEIS in its series CEIS Research Paper with number 138.

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Length: 31 pages
Date of creation: 16 Dec 2008
Date of revision: 16 Dec 2008
Handle: RePEc:rtv:ceisrp:138

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Postal: CEIS - Centre for Economic and International Studies - Faculty of Economics - University of Rome "Tor Vergata" - Via Columbia, 2 00133 Roma
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Web page: http://www.ceistorvergata.it
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Postal: CEIS - Centre for Economic and International Studies - Faculty of Economics - University of Rome "Tor Vergata" - Via Columbia, 2 00133 Roma
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Web: http://www.ceistorvergata.it

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Keywords: pharmaceutical market; regulation; innovation.;

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  1. Bhattacharya, Jayanta & Vogt, William B, 2003. "A Simple Model of Pharmaceutical Price Dynamics," Journal of Law and Economics, University of Chicago Press, vol. 46(2), pages 599-626, October.
  2. Toshimitsu, Tsuyoshi, 2003. "Optimal R&D policy and endogenous quality choice," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 21(8), pages 1159-1178, October.
  3. Bernardo Batiz-Lazo & k Sarah Holland, 2004. "The Global Pharmaceutical Industry, 2004," General Economics and Teaching, EconWPA 0405002, EconWPA.
  4. Gordon, Mirta B. & Nadal, Jean-Pierre & Phan, Denis & Vannimenus, Jean, 2005. "Seller's dilemma due to social interactions between customers," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 356(2), pages 628-640.
  5. Dale T. Mortensen & Randall Wright, 2002. "Competitive Pricing and Efficiency in Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(1), pages 1-20, February.
  6. Armstrong, M. & Vickers, J., 1992. "Price Discrimination, Competition and Regulation," Economics Series Working Papers 99140, University of Oxford, Department of Economics.
  7. A. Michael Spence, 1975. "Monopoly, Quality, and Regulation," Bell Journal of Economics, The RAND Corporation, vol. 6(2), pages 417-429, Autumn.
  8. Light, Donald W. & Warburton, Rebecca N., 2005. "Extraordinary claims require extraordinary evidence," Journal of Health Economics, Elsevier, vol. 24(5), pages 1030-1033, September.
  9. Berndt Ernst R. & Gottschalk Adrian H. B. & Philipson Tomas & Strobeck Matthew W., 2005. "Assessing the Impacts of the Prescription Drug User Fee Acts (PDUFA) on the FDA Approval Process," Forum for Health Economics & Policy, De Gruyter, De Gruyter, vol. 8(1), pages 1-25, January.
  10. Jean-Pierre Nadal & Denis Phan & Mirta Gordon & Jean Vannimenus, 2005. "Multiple equilibria in a monopoly market with heterogeneous agents and externalities," Quantitative Finance, Taylor & Francis Journals, Taylor & Francis Journals, vol. 5(6), pages 557-568.
  11. Marisa Miraldo, 2007. "Reference Pricing Versus Co-Payment in the Pharmaceutical Industry: Price, Quality and Market Coverage," Working Papers, Centre for Health Economics, University of York 025cherp, Centre for Health Economics, University of York.
  12. Besanko, David & Donnenfeld, Shabtai & White, Lawrence J, 1988. "The Multiproduct Firm, Quality Choice, and Regulation," Journal of Industrial Economics, Wiley Blackwell, vol. 36(4), pages 411-29, June.
  13. Patricia Danzon, 1997. "Price Discrimination for Pharmaceuticals: Welfare Effects in the US and the EU," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 4(3), pages 301-322.
  14. David Sappington, 2005. "Regulating Service Quality: A Survey," Journal of Regulatory Economics, Springer, Springer, vol. 27(2), pages 123-154, November.
  15. Enrico Pennings, 2004. "Optimal Pricing And Quality Choice When Investment In Quality Is Irreversible," Journal of Industrial Economics, Wiley Blackwell, vol. 52(4), pages 569-589, December.
  16. Spence, A Michael, 1973. "Job Market Signaling," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 87(3), pages 355-74, August.
  17. Patricia M. Danzon & Y. Richard Wang & Liang Wang, 2005. "The impact of price regulation on the launch delay of new drugs-evidence from twenty-five major markets in the 1990s," Health Economics, John Wiley & Sons, Ltd., vol. 14(3), pages 269-292.
  18. Peltzman, Sam, 1973. "An Evaluation of Consumer Protection Legislation: The 1962 Drug Amendments," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 81(5), pages 1049-91, Sept.-Oct.
  19. 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.
  20. repec:reg:wpaper:258 is not listed on IDEAS
  21. DiMasi, Joseph A. & Hansen, Ronald W. & Grabowski, Henry G., 2005. "Extraordinary claims require extraordinary evidence," Journal of Health Economics, Elsevier, vol. 24(5), pages 1034-1044, September.
  22. Ernst R. Berndt, 2002. "Pharmaceuticals in U.S. Health Care: Determinants of Quantity and Price," Journal of Economic Perspectives, American Economic Association, vol. 16(4), pages 45-66, Fall.
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