Margin Rate Rule: A New Drug Pricing Policy in Japan

Masaoki Tamura and 正興 田村

No 14-03, IIR Working Paper from Institute of Innovation Research, Hitotsubashi University

Abstract: This article theoretically evaluates the drug pricing policy in Japan and suggest an alternative more efficient policy. The Japanese current pricing rule “R2 rule” causes high drug price and social inefficiency that is similar to the well-known double marginalisation problem. To solve this problem, we derive an alternative pricing rule that we name “margin rate rule”. We show that the margin rate rule improves Pareto efficiency: the rule leads to both lower drug price and higher profit of the firms. There are three notable advantages in the margin rate rule. First, the government does not have to estimate the demand function, though it has the target price. The pharmaceutical firms, not the government, estimate drug efficacy, competition, and other demand information in pricing drugs. In this sense, the margin rate rule is a decentralised rule, and easy to manage. Second, the government can control the profit share between the firms and pharmacies in order to encourage pharmaceutical innovation. Third, the government can also control the drug-price margins so that meditations are not biased.

Keywords: Japanese Pharmaceutical Market; Drug Price; Drug Pricing Policy; Double Marginalisation (search for similar items in EconPapers)
JEL-codes: I11 L10 L42 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2014-06
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