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The New Prescription Drug Paradox: Pipeline Pressure and Rising Prices

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  • Alice M. Ellyson
  • Anirban Basu

Abstract

Economic literature has extensively studied how prices for incumbent pharmaceutical drugs respond to generic competition after entry. However, less attention has been paid to pricing behavior in anticipation of brand-to-brand competition. We contribute to this gap in the literature by both developing a model of pricing strategies for incumbent drug manufacturers under tiered-insurance anticipating branded competition. Our model predicts rising prices for incumbent drugs for a range of elasticities as the likelihood of entry increases from competitors with horizontally-differentiated products. Using the insulin market as a natural experiment, we exploit exogenous variation in a potential entrant's completion of clinical trials to identify the effect of drug pipeline pressure on the prices of incumbent drugs. Results suggest that pipeline pressure significantly increases the prices of incumbent drugs. We expect that similar pricing effects will be prevalent with potential biosimilar entry.

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  • Alice M. Ellyson & Anirban Basu, 2018. "The New Prescription Drug Paradox: Pipeline Pressure and Rising Prices," NBER Working Papers 24387, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:24387
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    More about this item

    JEL classification:

    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • K23 - Law and Economics - - Regulation and Business Law - - - Regulated Industries and Administrative Law
    • 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

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