IDEAS home Printed from
   My bibliography  Save this paper

Margin Rate Rule : A New Drug Pricing Policy in Japan


  • Tamura, Masaoki
  • 田村, 正興


This article theoretically evaluates the drug pricing policy in Japan and suggest an alternative more efficient policy. The Japanese current pricing rule “R2 rule” causes high drug price and social inefficiency that is similar to the well-known double marginalisation problem. To solve this problem, we derive an alternative pricing rule that we name “margin rate rule”. We show that the margin rate rule improves Pareto efficiency: the rule leads to both lower drug price and higher profit of the firms. There are three notable advantages in the margin rate rule. First, the government does not have to estimate the demand function, though it has the target price. The pharmaceutical firms, not the government, estimate drug efficacy, competition, and other demand information in pricing drugs. In this sense, the margin rate rule is a decentralised rule, and easy to manage. Second, the government can control the profit share between the firms and pharmacies in order to encourage pharmaceutical innovation. Third, the government can also control the drug-price margins so that meditations are not biased.

Suggested Citation

  • Tamura, Masaoki & 田村, 正興, 2014. "Margin Rate Rule : A New Drug Pricing Policy in Japan," IIR Working Paper 14-03, Institute of Innovation Research, Hitotsubashi University.
  • Handle: RePEc:hit:iirwps:14-03

    Download full text from publisher

    File URL:
    Download Restriction: no

    References listed on IDEAS

    1. 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.
    2. Erik Canton & Ed Westerhout, 1999. "A model for the Dutch pharmaceutical market," Health Economics, John Wiley & Sons, Ltd., vol. 8(5), pages 391-402, August.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Dhaval M. Dave, 2013. "Effects of Pharmaceutical Promotion: A Review and Assessment," NBER Working Papers 18830, National Bureau of Economic Research, Inc.
    2. Ramesh Govindaraj & Gnanaraj Chellaraj, 2002. "The Indian Pharmaceutical Sector : Issues and Options for Health Sector Reform," World Bank Publications - Books, The World Bank Group, number 15231, December.
    3. Gregory J. King & Xiuli Chao & Izak Duenyas, 2019. "Who Benefits When Prescription Drug Manufacturers Offer Copay Coupons?," Management Science, INFORMS, vol. 65(8), pages 3758-3775, August.
    4. 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.
    5. Darius Lakdawalla & Tomas Philipson & Y. Richard Wang, 2006. "Intellectual Property and Marketing," NBER Working Papers 12577, National Bureau of Economic Research, Inc.
    6. 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.
    7. 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.
    8. Christopher P. Adams, 2021. "CBO's Simulation Model of New Drug Development: Working Paper 2021-09," Working Papers 57010, Congressional Budget Office.
    9. 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.
    10. Phantratanamongkol, Supanan & Casalin, Fabrizio & Pang, Gu & Sanderson, Joseph, 2018. "The price-volume relationship for new and remanufactured smartphones," International Journal of Production Economics, Elsevier, vol. 199(C), pages 78-94.
    11. Suppliet, Moritz, 2020. "Umbrella branding in pharmaceutical markets," Journal of Health Economics, Elsevier, vol. 73(C).
    12. 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.
    13. Christina M. L. Kelton & Robert P. Rebelein, 2007. "A General‐Equilibrium Analysis of Public Policy for Pharmaceutical Prices," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 9(2), pages 285-318, April.
    14. Ed Westerhout & K. Folmer, 2002. "Financing medical specialist services in the Netherlands; welfare implications of imperfect agency," CPB Discussion Paper 6, CPB Netherlands Bureau for Economic Policy Analysis.
    15. 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.
    16. David B. Ridley & Chung-Ying Lee, 2020. "Does Medicare Reimbursement Drive Up Drug Launch Prices?," The Review of Economics and Statistics, MIT Press, vol. 102(5), pages 980-993, December.
    17. 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.
    18. Kremer, Sara T.M. & Bijmolt, Tammo H.A. & Leeflang, Peter S.H. & Wieringa, Jaap E., 2008. "Generalizations on the effectiveness of pharmaceutical promotional expenditures," International Journal of Research in Marketing, Elsevier, vol. 25(4), pages 234-246.
    19. 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.
    20. Ed Westerhout & K. Folmer, 2002. "Financing medical specialist services in the Netherlands; welfare implications of imperfect agency," CPB Discussion Paper 6.rdf, CPB Netherlands Bureau for Economic Policy Analysis.

    More about this item


    Japanese Pharmaceutical Market; Drug Price; Drug Pricing Policy; Double Marginalisation;
    All these keywords.

    JEL classification:

    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    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:hit:iirwps:14-03. See general information about how to correct material in RePEc.

    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 bibliographic 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.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Digital Resources Section, Hitotsubashi University Library (email available below). General contact details of provider: .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.