Value Pricing by Developing Countries and Its Impact on Allocative and Dynamic Efficiency in the Global Pharmaceutical Industry
25 Pages Posted: 27 Jan 2016
Date Written: 2015
I examine the potential impact of value pricing by large public- and private-sector payers in low- and middle-income countries (LMICs) on allocative and dynamic efficiency in the global pharmaceutical industry. I do so particularly in light of the fact that there remain vastly underutilized cost-effective health technologies in LMICs. If LMICs were to adopt value pricing, this will induce greater utilization of such technologies and a substitution effect away from relatively cost ineffective patented drugs. Such substitution will clearly improve allocative efficiency because it will bring prices closer to marginal costs, and because it will not harm and may improve efficiency-enhancing price discrimination. And because we live in a second-best world and will continue to do so as long as patent durations are bounded, it can improve rather than worsen dynamic efficiency by improving the quality of invention (in the sense of reducing fixed costs per unit of social surplus produced) and by reducing surplus extraction and dissipation without necessarily impairing incentives to innovate.
Keywords: global health, value pricing, allocative efficiency, dynamic efficiency, pharmaceutical pricing, cost-effectiveness analysis
Suggested Citation: Suggested Citation