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Pharmaceutical Industry, Drug Quality and Regulation - Evidence from US and Italy


Vincenzo Atella


University of Rome, Tor Vergata - Centre for International Studies on Economic Growth (CEIS); Department of Economics and Finance; University of Rome, Tor Vergata - Faculty of Economics

Jay Bhattacharya


Stanford University - Center for Primary Care and Outcomes Research; National Bureau of Economic Research (NBER)

Lorenzo Carbonari


University of Rome, Tor Vergata - Centre for International Studies on Economic Growth (CEIS)

December 16, 2008

CEIS Working Paper No. 138

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.

Number of Pages in PDF File: 31

Keywords: pharmaceutical market, regulation, innovation

JEL Classification: I11, O31, G18


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Date posted: December 16, 2008 ; Last revised: February 25, 2014

Suggested Citation

Atella, Vincenzo and Bhattacharya, Jay and Carbonari, Lorenzo, Pharmaceutical Industry, Drug Quality and Regulation - Evidence from US and Italy (December 16, 2008). CEIS Working Paper No. 138. Available at SSRN: https://ssrn.com/abstract=1316805 or http://dx.doi.org/10.2139/ssrn.1316805

Contact Information

Vincenzo Atella (Contact Author)
University of Rome, Tor Vergata - Centre for International Studies on Economic Growth (CEIS) ( email )
Via Columbia, 2
Rome, I-00133
Italy
+39 06 72595648 (Phone)
Department of Economics and Finance ( email )
Via Columbia 2
Roma, 00133
Italy
University of Rome, Tor Vergata - Faculty of Economics ( email )
Via Columbia n.2
I-00133 Rome, 00133
Italy
+39 06 72595635 (Phone)
+30 06 2020 500 (Fax)
HOME PAGE: http://www.economia.uniroma2.it/sefemeq/professori/atella/
Jayanta Bhattacharya
Stanford University - Center for Primary Care and Outcomes Research ( email )
Center for Health Policy
179 Encina Commons
Stanford, CA 94305-6019
United States
650-736-0404 (Phone)
650-723-1919 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Lorenzo Carbonari
University of Rome, Tor Vergata - Centre for International Studies on Economic Growth (CEIS) ( email )
Via Columbia, 2
Rome, I-00133
Italy
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