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The Determinants of Pricing in Pharmaceuticals: Are U.S. prices really higher than those of Canada?

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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. We show that market power and the quality of the product has a significantly positive impact of prices. The nationality of the producer appears to have a small and often insignificant impact on prices, which suggests that countries which regulates prices have relatively little power to do it in a way that advances narrow national interest. We produce a theoretical explanation for this phenomenon based on the fact that low negotiated prices in a country would have a knock-on effect in other markets, and is thus strongly resisted by producers. Another key finding is that the U.S. has prices that are not significantly higher than those of countries with similar income levels. This, together with the former observation on the effect of the nationality of producers casts doubt on the ability of countries to pursue "free-riding" regulation.

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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 1032.

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Date of creation: Apr 2007
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Handle: RePEc:upf:upfgen:1032

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Web page: http://www.econ.upf.edu/

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Related research
Keywords: Pharmaceutical prices

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Find related papers by JEL classification:
I10 - Health, Education, and Welfare - - Health - - - General
I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology

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References listed on IDEAS
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  1. Maria Arbatskaya & Morten Hviid & Greg Shaffer, 1999. "On the incidence and Variety of Low-Price Guarantees," CIE Discussion Papers 1999-10, University of Copenhagen. Department of Economics. Centre for Industrial Economics. [Downloadable!]
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  2. Mundlak, Yair, 1978. "On the Pooling of Time Series and Cross Section Data," Econometrica, Econometric Society, vol. 46(1), pages 69-85, January. [Downloadable!] (restricted)
  3. 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)
  4. 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)
  5. 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.
  6. 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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  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. 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)
  9. 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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  10. 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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