Implicit Prices and New Prescription Drugs: A Structural Hedonic Model 

Abstract

Newly launched pharmaceutical drugs provide substantial societal benefits, but they also tend to attract public scrutiny concerning their affordability and availability. Noting the critical relevance of pricing decisions for these products, this study examines various factors that influence branded prescription drug launch prices, including advertising expenditures, patent protections, drug characteristics, and firm- and market-level factors. With a foundation in a hedonic pricing framework, and employing local-linear nonparametric regressions, the authors analyze 415 prescription drugs, spanning 36 therapeutic categories, in the United States. The results indicate that higher advertising expenditures lower launch prices, in support of market penetration strategies. Stronger patent protections impact prices, but in a complex way: Each additional patent raises prices, but each extra year of exclusivity decreases them, though to a lesser extent. Drugs with priority status command a premium, whereas those targeting chronic conditions or extensions of existing brands feature lower prices. Both firm reputation and drug benefits increase prices too. By revealing which attributes determine launch prices and how, these findings enhance understanding of new product pricing and challenge a common assumption that advertising only inflates prices. Marketing managers can leverage these insights to optimize drug pricing strategies and pursue market success.

Keywords: healthcare, prescription drugs, pricing, Branded Pharmaceutical Drugs, Hedonic Regression, Local Linear Regression, patent protection, new product pricing

JEL Classification: D43, L13, C01