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

31 Pages Posted: 16 Dec 2008 Last revised: 25 Feb 2014

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)

Multiple version iconThere are 3 versions of this paper

Date Written: December 16, 2008

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

JEL Classification: I11, O31, G18

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

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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