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A Simple Model of Pharmaceutical Price Dynamics

  • Bhattacharya, Jayanta
  • Vogt, William B

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.

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File URL: http://dx.doi.org/10.1086/378575
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Article provided by University of Chicago Press in its journal Journal of Law and Economics.

Volume (Year): 46 (2003)
Issue (Month): 2 (October)
Pages: 599-626

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Handle: RePEc:ucp:jlawec:y:2003:v:46:i:2:p:599-626
Contact details of provider: Web page: http://www.journals.uchicago.edu/JLE/

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  1. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
  2. Andrew Ching, 2000. "Dynamic Equilibrium in the US Prescription Drug Market After Patent Expiration," Econometric Society World Congress 2000 Contributed Papers 1242, Econometric Society.
  3. Carl Shapiro, 1983. "Optimal Pricing of Experience Goods," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 497-507, Autumn.
  4. F. M. Scherer, 1993. "Pricing, Profits, and Technological Progress in the Pharmaceutical Industry," Journal of Economic Perspectives, American Economic Association, vol. 7(3), pages 97-115, Summer.
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  6. Bagwell, Kyle & Riordan, Michael H, 1991. "High and Declining Prices Signal Product Quality," American Economic Review, American Economic Association, vol. 81(1), pages 224-39, March.
  7. Richard G. Frank & David S. Salkever, 1997. "Generic Entry and the Pricing of Pharmaceuticals," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(1), pages 75-90, 03.
  8. repec:hoo:wpaper:e-90-11 is not listed on IDEAS
  9. 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.
  10. Thomas MaCurdy & David Green & Harry Paarsch, 1990. "Assessing Empirical Approaches for Analyzing Taxes and Labor Supply," Journal of Human Resources, University of Wisconsin Press, vol. 25(3), pages 415-490.
  11. Coscelli, Andrea, 2000. "The Importance of Doctors' and Patients' Preferences in the Prescription Decision," Journal of Industrial Economics, Wiley Blackwell, vol. 48(3), pages 349-69, September.
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