nep-ind New Economics Papers
on Industrial Organization
Issue of 2008‒12‒21
one paper chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Pharmaceutical Industry, Drug Quality and Regulation: Evidence from US and Italy By Vincenzo Atella; Jay Bhattacharya; Lorenzo Carbonari

  1. By: Vincenzo Atella; Jay Bhattacharya; Lorenzo Carbonari
    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.
    JEL: I1 L51 L65
    Date: 2008–12
    URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:14567&r=ind

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