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Differential Pricing of Pharmaceuticals: Theory, Evidence and Emerging Issues

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  • Patricia M. Danzon

    (University of Pennsylvania)

Abstract

Differential pricing—manufacturers varying prices for on-patent pharmaceuticals across markets—can, in theory, lead to increased patient access and improved research and development (R&D) incentives compared with charging a uniform price across markets. Theoretical models of price discrimination and Ramsey pricing support differentials based inversely on price elasticities, which are plausibly related to average per capita income. However, these models do not address absolute price levels and dynamic efficiency. Value-based differential pricing theory incorporates insurance coverage and addresses static and dynamic efficiency. Limited empirical evidence indicates a weak positive relationship between prices and gross domestic product (GDP) per capita. External referencing and parallel trade undermine differential pricing. We discuss previously neglected factors that undermine differential pricing in practice. High price growth relative to GDP in the USA leads to widening differentials between the USA and other countries. Concerns over the effects of confidential rebating challenges acceptance of this approach to implementing price differentials. The growth of branded generics in low- and middle-income countries leads to complex markets with product and price differentiation.

Suggested Citation

  • Patricia M. Danzon, 2018. "Differential Pricing of Pharmaceuticals: Theory, Evidence and Emerging Issues," PharmacoEconomics, Springer, vol. 36(12), pages 1395-1405, December.
    • Handle: RePEc:spr:pharme:v:36:y:2018:i:12:d:10.1007_s40273-018-0696-4
    DOI: 10.1007/s40273-018-0696-4
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    References listed on IDEAS

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    Cited by:

    1. Reisinger, Markus & Saurí, Lluís & Zenger, Hans, 2019. "Parallel imports, price controls, and innovation," Journal of Health Economics, Elsevier, vol. 66(C), pages 163-179.
    2. Shi, Wunan & Wouters, Olivier J. & Liu, Gordon & Mossialos, Elias & Yang, Xiuyun, 2020. "Association between provincial income levels and drug prices in China over the period 2010–2017," Social Science & Medicine, Elsevier, vol. 263(C).
    3. Raquel Fonseca & François Langot & Pierre-Carl Michaud & Thepthida Sopraseuth, 2020. "Understanding Cross-country Differences in Health Status and Expenditures," NBER Working Papers 26876, National Bureau of Economic Research, Inc.
    4. Jorge Mestre-Ferrandiz & Néboa Zozaya & Bleric Alcalá & Álvaro Hidalgo-Vega, 2018. "Multi-Indication Pricing: Nice in Theory but Can it Work in Practice?," PharmacoEconomics, Springer, vol. 36(12), pages 1407-1420, December.
    5. Laura Birg, 2023. "Pharmaceutical regulation under market integration through parallel trade," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 56(4), pages 1322-1346, November.
    6. Dewatripont, Mathias, 2022. "Which policies for vaccine innovation and delivery in Europe?," International Journal of Industrial Organization, Elsevier, vol. 84(C).
    7. Kjellberg, Hans & Sjögren, Ebba & Krafve, Linus Johansson, 2023. "The functions of known to be inaccurate prices in markets: A cross-country comparison of pharmaceutical list pricing," Journal of Business Research, Elsevier, vol. 167(C).
    8. Piotr Merks & Urszula Religioni & Nuno Pinto de Castro & Anna Augustynowicz & Katarzyna Plagens-Rotman & David Brindley & Anna Kowalczuk & Justyna Kaźmierczak & Agnieszka Neumann-Podczaska & Eliza Bli, 2022. "Falsified Medicines Directive in a Secondary Care Environment—Impact on Supply Chain," IJERPH, MDPI, vol. 19(6), pages 1-11, March.
    9. Nunan, Daniel & Di Domenico, MariaLaura, 2022. "Value creation in an algorithmic world: Towards an ethics of dynamic pricing," Journal of Business Research, Elsevier, vol. 150(C), pages 451-460.
    10. Mathias Dewatripont, 2022. "Which Policies for Vaccine Innovation and Delivery in Europe ?," Working Papers ECARES 2022-14, ULB -- Universite Libre de Bruxelles.

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