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Pharmaceutical industry, drug quality and regulation. Evidence from US and Italy

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Abstract

The aim of this article is to analyze the relationship between drug price and drug quality and how it varies across two of the most common regulatory regimes in the pharmaceutical market: Minimum Efficacy Standards (MES) and Price Controls (PC). We develop a model of adverse selection where a pharmaceutical company can charge different prices to a heterogeneous group of buyers for its (innovative) drug, and we evaluate the properties of the equilibria under the two regimes. We model consumer heterogeneity stemming from differences in the willingness-to-pay for drug quality, measured through ex-post efficacy. The theoretical analysis provides two main results. First, the average drug quality delivered is higher under the MES regime than in the PC regime or a in combination of the two. Second, PC regulation reduces the difference in terms of high-low quality drug prices. The empirical analysis based on Italian and US data corroborates these results.

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  • Vincenzo Atella & Jay Bhattacharya & Lorenzo Carbonari, 2008. "Pharmaceutical industry, drug quality and regulation. Evidence from US and Italy," CEIS Research Paper 138, Tor Vergata University, CEIS, revised 16 Dec 2008.
    • Handle: RePEc:rtv:ceisrp:138
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    Cited by:

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    2. Simone Ghislandi & Michael Kuhn, 2016. "Asymmetric information in the regulation of the access to markets," Department of Economics Working Papers wuwp219, Vienna University of Economics and Business, Department of Economics.

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    More about this item

    Keywords

    pharmaceutical market; regulation; innovation.;
    All these keywords.

    JEL classification:

    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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