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Margin Rate Rule : A New Drug Pricing Policy in Japan

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  • Tamura, Masaoki
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    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.

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    Paper provided by Institute of Innovation Research, Hitotsubashi University in its series IIR Working Paper with number 14-03.

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    Length: 25 p.
    Date of creation: Jun 2014
    Handle: RePEc:hit:iirwps:14-03
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    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.
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