IDEAS home Printed from https://ideas.repec.org/a/taf/ijecbs/v4y1997i3p301-322.html
   My bibliography  Save this article

Price Discrimination for Pharmaceuticals: Welfare Effects in the US and the EU

Author

Listed:
  • Patricia Danzon

Abstract

Standard analysis of the welfare effects of price discrimination for pharma-ceuticals (Scherer, F.M., "How US Antitrust Can Go Astray: The Brand Name Prescription Drug Litigation", International Journal of Business and Economics, 1997, 4, 3, 000-000) is incomplete because it presumes the optimality of marginal cost pricing, ignoring the sunk costs of R&D. Pharmaceutical R&D is a global joint cost of serving all consumers worldwide; it accounts for roughly 30% of total costs. Ramsey pricing principles imply that differential pricing related to inverse demand elasticities is the second best optimal strategy to cover the joint costs. Actual price differentials to managed care customers in the US should roughly approximate Ramsey optimal differentials, in the absence of legal constraints. In the European Union (EU), traditional price differentials between countries are being undermined by parallel trade and regulation based on foreign prices. This break down of market segmentation leads manufacturers to adopt uniform prices EU-wide. Efficiency and distributive effects of such policies are probably negative. Monopsony is a more serious problem in the EU, hence actual price differentials may exceed Ramsey optimal differences. Confidential contracts between manufacturers and governments, including rebates off a common list price, would preserve ex post price differentials and should be consistent with EU law

Suggested Citation

  • 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.
  • Handle: RePEc:taf:ijecbs:v:4:y:1997:i:3:p:301-322
    DOI: 10.1080/758523212
    as

    Download full text from publisher

    File URL: http://www.tandfonline.com/10.1080/758523212
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, January.
    2. repec:ohe:monogr:000430 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Pharmaceutical industry; Price discrimination; Ramsey pricing; Antitrust policy; Parallel trade; Regulation; JEL classifications: L41; L51; L65; 111; K21;

    JEL classification:

    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology; Plastics
    • K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:ijecbs:v:4:y:1997:i:3:p:301-322. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Chris Longhurst). General contact details of provider: http://www.tandfonline.com/CIJB20 .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.