Bargaining and International Reference Pricing in the Pharmaceutical Industry

81 Pages Posted: 16 May 2022 Last revised: 14 Apr 2023

See all articles by Pierre Dubois

Pierre Dubois

University of Toulouse Capitole - Toulouse School of Economics

Ashvin Gandhi

University of California, Los Angeles (UCLA) - Anderson School of Management

Shoshana Vasserman

Stanford Graduate School of Business

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Date Written: May 2022

Abstract

The United States spends twice as much per person on pharmaceuticals as European countries, in large part because prices are much higher in the US. This fact has led policymakers to consider legislation for price controls. This paper assesses the effects of a US international reference pricing policy that would cap prices in US markets by those offered in reference countries. We estimate a structural model of demand and supply for pharmaceuticals in the US and reference countries like Canada where prices are set through a negotiation process between pharmaceutical companies and the government. We then simulate the counterfactual equilibrium under such international reference pricing rules, allowing firms to internalize the cross-country externalities introduced by these policies. We find that in general, these policies would result in much smaller price decreases in the US than price increases in reference countries. The magnitude of these effects depends on the number, size and market structure of references countries. We compare these policies with a direct bargaining on prices in the US.

Suggested Citation

Dubois, Pierre and Gandhi, Ashvin and Vasserman, Shoshana, Bargaining and International Reference Pricing in the Pharmaceutical Industry (May 2022). NBER Working Paper No. w30053, Available at SSRN: https://ssrn.com/abstract=4110756

Pierre Dubois (Contact Author)

University of Toulouse Capitole - Toulouse School of Economics ( email )

Toulouse
France

Ashvin Gandhi

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

HOME PAGE: http://www.ashvingandhi.com

Shoshana Vasserman

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

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