Pharmaceutical industry, drug quality and regulation. Evidence from US and Italy

Vincenzo Atella, Jay Bhattacharya () and Lorenzo Carbonari
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Jay Bhattacharya: Stanford University and NBER, http://www.ceistorvergata.it

No 138, CEIS Research Paper from Tor Vergata University, CEIS

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.

Keywords: pharmaceutical market; regulation; innovation. (search for similar items in EconPapers)
JEL-codes: G18 I11 O31 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2008-12-16, Revised 2008-12-16
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Working Paper: Pharmaceutical Industry, Drug Quality and Regulation: Evidence from US and Italy (2008)
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