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Research funding and price negotiation for new drugs

Author

Listed:
  • Francesca Barigozzi

    (University of Bologna, Italy)

  • Izabela Jelovac

    (Univ Lyon, CNRS, GATE L-SE UMR 5824, F-69131 Ecully, France)

Abstract

Pharmaceutical innovations result from the successful achievement of basic research, produced by an upstream lab, and applied research, produced by a downstream lab. We focus on the negotiation process to finance basic research by setting public and private grants and to agree on the final price of a new drug. We show that exclusive funding of basic research is desirable. To increase consumers’ surplus and reduce negotiated prices for new drugs, basic and applied research should be integrated if the lab producing applied research has a relatively large bargaining power. When instead the health authority has the larger bargaining power, integration with the producer of basic research increases negotiated prices for new drugs and should be avoided, unless the gain in bargaining power after the integration is extremely high.

Suggested Citation

  • Francesca Barigozzi & Izabela Jelovac, 2019. "Research funding and price negotiation for new drugs," Working Papers 1901, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
    • Handle: RePEc:gat:wpaper:1902
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    References listed on IDEAS

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    5. Lacetera, Nicola & Zirulia, Lorenzo, 2012. "Individual preferences, organization, and competition in a model of R&D incentive provision," Journal of Economic Behavior & Organization, Elsevier, vol. 84(2), pages 550-570.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Chris Sampson’s journal round-up for 28th December 2020
      by Chris Sampson in The Academic Health Economists' Blog on 2020-12-28 12:00:00

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    Cited by:

    1. Laura Grassi & Simone Fantaccini, 2022. "An overview of Fintech applications to solve the puzzle of health care funding: state-of-the-art in medical crowdfunding," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-27, December.
    2. Joan Costa‐Font & Rosella Levaggi, 2020. "Innovation, aging, and health care: Unraveling “silver” from “red” herrings?," Health Economics, John Wiley & Sons, Ltd., vol. 29(S1), pages 3-7, October.
    3. Thomas M. Fullerton & Steven L. Fullerton, 2022. "Aggregate Online Brand Name Pharmacy Price Dynamics for the United States and Mexico," Economies, MDPI, vol. 10(5), pages 1-5, May.

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    More about this item

    Keywords

    Pharmaceutical innovation; drug prices; negotiation; basic research; applied research;
    All these keywords.

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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