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Market-Based Solutions to Vital Economic Issues
Research
Aug 1, 2019

Pricing Power And New Prescription Drugs

Abstract

The pricing of prescription drugs comes under persistent public scrutiny, yet limited empirical evidence details the determinants of these price levels. This study provides a price function specification for newly launched drugs, with marginal cost and pricing power components. The sources of pharmaceutical firms’ pricing power include patent protection, marketing spending, firm reputation, and number of players in the market. A novel data set details 328 prescription drugs introduced in the United States between 1984 and 2003 in 30 therapeutic categories. The results indicate that 15% of the price variation stems from the identified sources of pricing power; each source has a statistically significant influence. Priority drugs and orphan drugs invoke higher prices; drug prices increase with the number of patents. Firm reputation due to more recent drug introductions also results in higher prices, and early entrants tend to command higher prices than later ones. Finally, pharmaceutical firms often are criticized for their marketing spending, but the results indicate a negative relationship between marketing and drug prices, consistent with a penetration pricing strategy to reach more patients. This study thus contributes to contemporary prescription drug pricing debates, by revealing the extent to which pricing power influences launch price decisions.


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