Working Paper: CEPR ID: DP17293
Authors: Pierre Dubois; Ashvin Gandhi; Shoshana Vasserman
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.
Keywords: Pharmaceuticals; International Reference Pricing; Bargaining; Empirical; Industrial Organization
JEL Codes: L22; I18; C51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Implementation of US international reference pricing policy (F13) | Smaller price decreases in the US (E39) |
| Implementation of US international reference pricing policy (F13) | Price increases in reference countries (F31) |
| Smaller price decreases in the US (E39) | Asymmetric impact of pricing policy (D49) |
| International reference pricing (F14) | Limited significant savings for US consumers (D19) |
| International reference pricing (F14) | Global pharmaceutical profits may increase (L65) |
| Competitive structure and elasticities of demand (L11) | Outcomes of pricing policies (L11) |
| Bargaining power of regulators (L51) | Outcomes of pricing policies (L11) |