Informational Spillovers and Strategic Launch Delay of Pharmaceutical Drugs
27 Pages Posted: 15 Jun 2007
Date Written: November 20, 2006
This paper analyzes informational spillovers in the pricing of drugs, which occur as a result of sequential launching. With sequential launches and asymmetric information about the production and distribution costs of a drug, the acceptation of a price where the drug is first launched might reveal the firm's private information to subsequent players. Information spillovers can be avoided by simultaneous launching in all countries. However, we identify conditions under which the firm can use launch delay and the consequent existence of spillovers to commit to the rejection of low prices. These conditions are: (i) the unit subsidy of drugs varies across countries; (ii) one of the countries has a larger aggregate demand and/or the firm is sufficiently patient (iii) the prior that countries hold about the firm being low cost takes intermediate values. If these conditions hold, a firm will chose to delay launch in the country with larger consumer copayment.
Keywords: Pharmaceutical drugs, pricing, launch delay, asymmetric information
JEL Classification: H51, I11
Suggested Citation: Suggested Citation