Pharma Tender Processes: Modeling Auction Outcomes

This chapter summarizes the overall tendering and contracting process in the pharmaceutical industry by providing an overview of the first-sealed price auction theory, auction rules, and drug pricing mechanism of different countries. Comparing procurement systems across Asia, Africa, Europe, and Latin America, the review casts light on various pharmaceutical bidding systems across the world and their impact on drug prices. Then, this review focuses on the empirical estimation of first-price auction models. In terms of model specification, we compare the two most commonly used empirical methods for bidding price estimation: structural models and reduced form approaches to test the auction theory. Maximum likelihood estimation is the most frequently used method for structural estimation in literature and selection bias correction is widely adopted using reduced form models. In addition to parametric model construction, we also provide an extensive introduction of non-parametric testing methodologies, including non-parametric estimation and quantile-based estimation to reduce the computation complexity and further illustrate how auction theory could be validated by real-world applications. Additional thoughts and adjustments on non-parametric testing are brought up based on a real-world tendering use case from a large multi-national pharmaceutical company.