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Price Discrimination for Pharmaceuticals: Welfare Effects in the US and the EU

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  • Patricia Danzon

Abstract

Standard analysis of the welfare effects of price discrimination for pharma-ceuticals (Scherer, F.M., "How US Antitrust Can Go Astray: The Brand Name Prescription Drug Litigation", International Journal of Business and Economics, 1997, 4, 3, 000-000) is incomplete because it presumes the optimality of marginal cost pricing, ignoring the sunk costs of R&D. Pharmaceutical R&D is a global joint cost of serving all consumers worldwide; it accounts for roughly 30% of total costs. Ramsey pricing principles imply that differential pricing related to inverse demand elasticities is the second best optimal strategy to cover the joint costs. Actual price differentials to managed care customers in the US should roughly approximate Ramsey optimal differentials, in the absence of legal constraints. In the European Union (EU), traditional price differentials between countries are being undermined by parallel trade and regulation based on foreign prices. This break down of market segmentation leads manufacturers to adopt uniform prices EU-wide. Efficiency and distributive effects of such policies are probably negative. Monopsony is a more serious problem in the EU, hence actual price differentials may exceed Ramsey optimal differences. Confidential contracts between manufacturers and governments, including rebates off a common list price, would preserve ex post price differentials and should be consistent with EU law

Suggested Citation

  • Patricia Danzon, 1997. "Price Discrimination for Pharmaceuticals: Welfare Effects in the US and the EU," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 4(3), pages 301-322.
    • Handle: RePEc:taf:ijecbs:v:4:y:1997:i:3:p:301-322
    DOI: 10.1080/758523212
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    References listed on IDEAS

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    1. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, December.
    2. Patricia Danzon, 1997. "Trade and Price Differentials for Pharmaceuticals: Policy Options," Monograph 000430, Office of Health Economics.
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    More about this item

    Keywords

    Pharmaceutical industry; Price discrimination; Ramsey pricing; Antitrust policy; Parallel trade; Regulation; JEL classifications: L41; L51; L65; 111; K21;
    All these keywords.

    JEL classification:

    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology; Plastics
    • K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law

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