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The strategic interaction between firms and formulary committees: Effects on the prices of new drugs

  • Garci­a-Alonso, Mari­a D.C.
  • Garci­a-Mariñoso, Begoña

We study the strategic interaction between the pricing decisions of a pharmaceutical firm and the reimbursement decisions of a government agency which grants reimbursement rights to patients for whom new drugs are most cost-effective. If the reimbursement decision precedes pricing, the agency only reimburses some patients if the drug's private and public health benefits diverge. This is, there are consumption externalities and the variable cost of the drug exceeds the alternative's. Contrarily, if the firm can commit to a price before reimbursement, a strategic effect implies that by setting a sufficiently high price, the firm can make the agency more willing to reimburse than without commitment.

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Article provided by Elsevier in its journal Journal of Health Economics.

Volume (Year): 27 (2008)
Issue (Month): 2 (March)
Pages: 377-404

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Handle: RePEc:eee:jhecon:v:27:y:2008:i:2:p:377-404
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505560

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  1. Kyle Bagwell & Michael Riordan, 1988. "High and Declining Prices Signal Product Quality," Discussion Papers 808, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. Carl Shapiro, 1983. "Optimal Pricing of Experience Goods," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 497-507, Autumn.
  3. Antonio Cabrales, 2003. "Pharmaceutical generics, vertical product differentiation and public policy," Working Papers, Research Center on Health and Economics 662, Department of Economics and Business, Universitat Pompeu Fabra.
  4. 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.
  5. Schmalensee, Richard, 1982. "Product Differentiation Advantages of Pioneering Brands," American Economic Review, American Economic Association, vol. 72(3), pages 349-65, June.
  6. Olmstead, Todd & Zeckhauser, Richard, 1999. "The menu-setting problem and subsidized prices: drug formulary illustration," Journal of Health Economics, Elsevier, vol. 18(5), pages 523-550, October.
  7. Laux, Fritz L., 2000. "Addiction as a market failure: using rational addiction results to justify tobacco regulation," Journal of Health Economics, Elsevier, vol. 19(4), pages 421-437, July.
  8. Joan-Ramon Borrell, 2003. "Drug Price Differentials Caused by Formularies and Price Caps," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 10(1), pages 35-48.
  9. Francis, Peter J., 1997. "Dynamic epidemiology and the market for vaccinations," Journal of Public Economics, Elsevier, vol. 63(3), pages 383-406, February.
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