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Bargaining and International Reference Pricing in the Pharmaceutical Industry

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  • Dubois, Pierre
  • Gandhi, Ashvin
  • Vasserman, Shoshana

Abstract

The United States spends twice as much per person on pharmaceuticals as European countries, in large part because prices are much higher in the US. This fact has led policymakers to consider legislation for price controls. This paper assesses the effects of a US international reference pricing policy that would cap prices in US markets by those offered in reference countries. We estimate a structural model of demand and supply for pharmaceuticals in the US and reference countries like Canada where prices are set through a negotiation process between pharmaceutical companies and the government. We then simulate the counterfactual equilibrium under such international reference pricing rules, allowing firms to internalize the cross-country externalities introduced by these policies. We find that in general, these policies would result in much smaller price decreases in the US than price increases in reference countries. The magnitude of these effects depends on the number, size and market structure of references countries. We compare these policies with a direct bargaining on prices in the US.

Suggested Citation

  • Dubois, Pierre & Gandhi, Ashvin & Vasserman, Shoshana, 2022. "Bargaining and International Reference Pricing in the Pharmaceutical Industry," TSE Working Papers 22-1338, Toulouse School of Economics (TSE).
  • Handle: RePEc:tse:wpaper:126993
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    3. Verboven, Frank & Canzian, Giulia & Mazzarella, Gianluca & Ranchail, Louis & Verzillo, Stefano, 2021. "Evaluating the Impact of Price Caps - Evidence from the European Roam-Like-at-Home Regulation," CEPR Discussion Papers 16554, C.E.P.R. Discussion Papers.
    4. Sebastian Linde & Brandon Norton & Ralph Siebert, 2019. "The Effect of Bargaining Power Determinants on Pharmaceutical Prices," CESifo Working Paper Series 7988, CESifo.
    5. Kortelainen, Mika & Markkanen, Jaakko & Toivanen, Otto & Siikanen, Markku, 2023. "The Effects of Price Regulation on Pharmaceutical Expenditure and Availability," CEPR Discussion Papers 18497, C.E.P.R. Discussion Papers.

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    More about this item

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C57 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Econometrics of Games and Auctions
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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