The New Prescription Drug Paradox: Pipeline Pressure and Rising Prices

Alice M. Ellyson and Anirban Basu

No 24387, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: I11 I13 I18 K23 L11 L13 (search for similar items in EconPapers)
Date: 2018-03
New Economics Papers: this item is included in nep-com and nep-hea
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