Strategic interaction in pharmaceutical price regulation and innovation

Thursday 30 November 2017, 1.00PM to 2.00pm

Speaker: Martin Forster (York)

Abstract: We present a model of the strategic interaction among authorities regulating pharmaceutical prices in different countries, and the resulting global investment decisions of pharmaceutical firms. Regulators' decisions affect consumer surplus directly via prices and indirectly through the effect of price changes on firms' profits and hence R&D investment decisions, which in turn affect patient health. The positive externality of a price increase in one country provides an incentive for other countries to free-ride. We study how relevant characteristics at the country level can affect optimal decisions by regulators and the possible equilibria.

The theoretical predictions of the model are tested using price data for a set of 70 cancer drugs in 25 countries. We find evidence of behaviour consistent with the free-riding hypothesis which, in line with the theoretical predictions, can take different forms depending on the characteristics of the country. In large markets, regulators tend to react to increases in other countries' prices by lowering their own prices. In small markets, regulators' decisions are consistent with the objective of introducing the product at a price which is as low as possible, irrespective of prices set elsewhere.

We discuss the policy implications of our results for the recent proposal to move towards a joint pharmaceutical procurement process at the European level.‚Äč

Location: A/EC202 Economics Staff Room

Admission: Staff and PhD students