Competition matters: uniform vs. indication-based pricing of pharmaceuticals

Kurt Brekke (), Dag Morten Dalen () and Odd Rune Straume
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Dag Morten Dalen: Dept. of Economics, BI Norwegian Business School, Postal: BI , Department of Economics, Nydalsveien 37, 0484 Oslo, Norway, https://www.bi.no/om-bi/ansatte/institutt-for-samfunnsokonomi/dag-morten-dalen/

No 1/2025, Discussion Paper Series in Economics from Norwegian School of Economics, Department of Economics

Abstract: Pharmaceutical expenditures are rising rapidly, driven in part by the innovation of highly effective but very expensive drug therapies that treat multiple diseases. While these drugs offer substantial health benefits, payers face a critical trade-off between cost containment and access to new medicines. A key policy question is whether producers should be restricted to uniform pricing or allowed to use indication-based pricing, where prices vary across patient groups. We analyse how this choice affects drug producers' incentives to invest in new indications, their pricing strategies, and the resulting surplus for health plans. In a monopoly setting, indication-based pricing yields higher profits and thus strengthens incentives to invest in new indications, while the payer prefers uniform pricing unless the fixed investment costs cannot be recouped. The novelty of our study lies in showing that monopoly-based insights may not hold under competition. Specifically, we identify a softening-of-competition effect, where a uniform pricing restriction serves as a credible commitment to raise prices in the competitive market. In this case, the health plan generally favours indication-based pricing to reduce costs. However, an exception arises, where both parties prefer uniform pricing, if the uniform price generates significant health gains through demand expansion in the original monopoly market. Our findings suggest that neither pricing scheme is universally optimal, underscoring the need for case-by-case assessments across drug classes.

Keywords: Pharmaceuticals; Innovation incentives; Payer pricing schemes (search for similar items in EconPapers)
JEL-codes: I18 L13 L65 O31 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2025-01-08
New Economics Papers: this item is included in nep-com, nep-hea, nep-ind and nep-reg
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Working Paper: Competition matters: uniform vs. indication-based pricing of pharmaceuticals (2025)
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