Research Funding and Price Negotiation for New Drugs
GATE Working Paper No. 1902
16 Pages Posted: 23 Jan 2019
Date Written: December 20, 2018
Pharmaceutical innovations result from the successful achievement of basic research, produced by an upstream lab, and applied research, produced by a downstream lab. We focus on the negotiation process to finance basic research by setting public and private grants and to agree on the final price of a new drug. We show that exclusive funding of basic research is desirable. To increase consumers’ surplus and reduce negotiated prices for new drugs, basic and applied research should be integrated if the lab producing applied research has a relatively large bargaining power. When instead the health authority has the larger bargaining power, integration with the producer of basic research increases negotiated prices for new drugs and should be avoided, unless the gain in bargaining power after the integration is extremely high.
Keywords: pharmaceutical innovation, drug prices, negotiation, basic research, applied research
JEL Classification: D8
Suggested Citation: Suggested Citation