| Abstract: |
The aim of this article is to analyze the relationship between drug price and
drug quality and how it varies across two of the most common regulatory
regimes in the pharmaceutical market: Minimum Efficacy Standards (MES) and
Price Controls (PC). We develop a model of adverse selection where a
pharmaceutical company can charge different prices to a heterogeneous group of
buyers for its (innovative) drug, and we evaluate the properties of the
equilibria under the two regimes. We model consumer heterogeneity stemming
from differences in the willingness-to-pay for drug quality, measured through
ex-post efficacy. The theoretical analysis provides two main results. First,
the average drug quality delivered is higher under the MES regime than in the
PC regime or a in combination of the two. Second, PC regulation reduces the
difference in terms of high-low quality drug prices. The empirical analysis
based on Italian and US data corroborates these results. |