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A Simple Model of Pharmaceutical Price Dynamics

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  • Bhattacharya, Jayanta
  • Vogt, William B

Abstract

Branded pharmaceutical firms use price and promotional strategy to manage public knowledge about their drugs. We propose a dynamic theory of pharmaceutical pricing and conduct an exploratory empirical analysis inspired by the theory. Our theory predicts a pattern of increasing prices and decreasing promotional activities over a drug's life cycle. Prices are kept low and advertising levels high early in the life cycle in order to build public knowledge about the drug. As knowledge grows, prices rise and advertising falls. If the management of this stock is important enough, this tendency of prices to rise can overwhelm the price-decreasing effect of entry by generic competitors late in the drug life cycle. We argue that our theory of price dynamics explains empirical regularities in this industry.

Suggested Citation

  • 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.
  • Handle: RePEc:ucp:jlawec:y:2003:v:46:i:2:p:599-626
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    File URL: http://dx.doi.org/10.1086/378575
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    References listed on IDEAS

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    1. Andrew Ching, 2000. "Dynamic Equilibrium in the US Prescription Drug Market After Patent Expiration," Econometric Society World Congress 2000 Contributed Papers 1242, Econometric Society.
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    Cited by:

    1. Herr, A. & Suppliet, M., 2011. "Co-Payment Exemptions and Reference Prices: an Empirical Study of Pharmaceutical Prices in Germany," Health, Econometrics and Data Group (HEDG) Working Papers 11/18, HEDG, c/o Department of Economics, University of York.
    2. Juan-José Ganuza & Gerard Llobet & Beatriz Domínguez, 2009. "R& D in the Pharmaceutical Industry: A World of Small Innovations," Management Science, INFORMS, vol. 55(4), pages 539-551, April.
    3. Lakdawalla, Darius & Sood, Neeraj & Gu, Qian, 2013. "Pharmaceutical advertising and Medicare Part D," Journal of Health Economics, Elsevier, vol. 32(6), pages 1356-1367.
    4. Dirk Bergemann & Juuso Valimaki, 2004. "Monopoly Pricing of Experience Goods," Cowles Foundation Discussion Papers 1463R, Cowles Foundation for Research in Economics, Yale University, revised May 2005.
    5. Dhaval M. Dave, 2013. "Effects of Pharmaceutical Promotion: A Review and Assessment," NBER Working Papers 18830, National Bureau of Economic Research, Inc.
    6. Lee G. Branstetter & Chirantan Chatterjee & Matthew Higgins, 2011. "Regulation and Welfare: Evidence from Paragraph IV Generic Entry in the Pharmaceutical Industry," NBER Working Papers 17188, National Bureau of Economic Research, Inc.
    7. repec:wly:hlthec:v:26:y:2017:i:4:p:450-468 is not listed on IDEAS
    8. Ferrara, Ida & Missios, Paul, 2012. "Pricing of drugs with heterogeneous health insurance coverage," Journal of Health Economics, Elsevier, vol. 31(2), pages 440-456.
    9. repec:kap:hcarem:v:20:y:2017:i:3:d:10.1007_s10729-016-9362-6 is not listed on IDEAS
    10. Arcidiacono, Peter & Ellickson, Paul B. & Landry, Peter & Ridley, David B., 2013. "Pharmaceutical followers," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 538-553.
    11. Rosemary Avery & Donald Kenkel & Dean Lillard & Alan Mathios, 2007. "Regulating advertisements: the case of smoking cessation products," Journal of Regulatory Economics, Springer, vol. 31(2), pages 185-208, April.
    12. Vincenzo Atella & Jay Bhattacharya & Lorenzo Carbonari, 2008. "Pharmaceutical Industry, Drug Quality and Regulation: Evidence from US and Italy," NBER Working Papers 14567, National Bureau of Economic Research, Inc.
    13. Suppliet, Moritz, 2017. "Umbrella Branding in Pharmaceutical Markets," Discussion Paper 2017-034, Tilburg University, Tilburg Law and Economic Center.
    14. Tamura, Masaoki, 2014. "Margin Rate Rule : A New Drug Pricing Policy in Japan," IIR Working Paper 14-03, Institute of Innovation Research, Hitotsubashi University.
    15. Alice M. Ellyson & Anirban Basu, 2018. "The New Prescription Drug Paradox: Pipeline Pressure and Rising Prices," NBER Working Papers 24387, National Bureau of Economic Research, Inc.
    16. Anusua Datta & Dhaval Dave, 2017. "Effects of Physician‐directed Pharmaceutical Promotion on Prescription Behaviors: Longitudinal Evidence," Health Economics, John Wiley & Sons, Ltd., vol. 26(4), pages 450-468, April.
    17. Darius Lakdawalla & Tomas Philipson & Y. Richard Wang, 2006. "Intellectual Property and Marketing," NBER Working Papers 12577, National Bureau of Economic Research, Inc.
    18. Darius Lakdawalla & Tomas Philipson, 2012. "Does Intellectual Property Restrict Output? An Analysis of Pharmaceutical Markets," Journal of Law and Economics, University of Chicago Press, vol. 55(1), pages 151-187.
    19. Panattoni, Laura E., 2011. "The effect of Paragraph IV decisions and generic entry before patent expiration on brand pharmaceutical firms," Journal of Health Economics, Elsevier, vol. 30(1), pages 126-145, January.
    20. Malani, Anup & Reif, Julian, 2015. "Interpreting pre-trends as anticipation: Impact on estimated treatment effects from tort reform," Journal of Public Economics, Elsevier, vol. 124(C), pages 1-17.
    21. Jie Chen & John Rizzo, 2012. "Pricing dynamics and product quality: the case of antidepressant drugs," Empirical Economics, Springer, vol. 42(1), pages 279-300, February.
    22. Henry G. Grabowski & David B. Ridley & Kevin A. Schulman, 2007. "Entry and competition in generic biologics," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(4-5), pages 439-451.
    23. Patricia M. Danzon & Eric L. Keuffel, 2014. "Regulation of the Pharmaceutical-Biotechnology Industry," NBER Chapters,in: Economic Regulation and Its Reform: What Have We Learned?, pages 407-484 National Bureau of Economic Research, Inc.

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