Price Regulation and Competition in Japanese Pharmaceutical Market

Pharmaceutical price control has achieved attentions of policy makers in the world. Japanese pharmaceutical market provides a good case study for price control. First, the Japanese pharmaceutical market has been tightly regulated by price control. Second, the difference between the official price for the National Health Insurance purpose and the wholesale price is expected to distort demand and supply of pharmaceuticals. This paper studies Japanese pharmaceutical price control by using data on 39 cardiovascular pharmaceuticals in the period between 1985 and 1999. We estimate a relationship how demand is determined by official price, wholesale price, and other variables. This study finds that pharmaceuticals have fairly elastic coefficient with the wholesale price. This underscores importance of wholesale price reduction to gain demand. We find significant differences between new products and old products. For new products without generic entry, pharmaceutical firms tend to maintain official price as high as possible to achieve demand while they refrain from lowering wholesale price. For old products with generic competition, pharmaceutical firms resort to wholesale price competition. The government should distinguish old products from new products in its price control. This study also finds that product specific effects are more important than price related variables in determining pharmaceutical demand. Finally, this study finds that product specific effects have declined as products gets old up to 15 years after introduction. Then product specific effects start to increase after 15 years, which fact shows generic competition has not been fully realized in Japanese market.