Working Paper: NBER ID: w24387
Authors: Alice M. Ellyson; Anirban Basu
Abstract: Economic literature has extensively studied how prices for incumbent pharmaceutical drugs respond to generic competition after entry. However, less attention has been paid to pricing behavior in anticipation of brand-to-brand competition. We contribute to this gap in the literature by both developing a model of pricing strategies for incumbent drug manufacturers under tiered-insurance anticipating branded competition. Our model predicts rising prices for incumbent drugs for a range of elasticities as the likelihood of entry increases from competitors with horizontally-differentiated products. Using the insulin market as a natural experiment, we exploit exogenous variation in a potential entrant's completion of clinical trials to identify the effect of drug pipeline pressure on the prices of incumbent drugs. Results suggest that pipeline pressure significantly increases the prices of incumbent drugs. We expect that similar pricing effects will be prevalent with potential biosimilar entry.
Keywords: pharmaceutical pricing; pipeline pressure; branded competition; insulin market; drug pricing strategies
JEL Codes: I11; I13; I18; K23; L11; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| pipeline pressure (L95) | incumbent drug prices (P22) |
| completion of clinical trials (G10) | incumbent drug prices (P22) |
| pipeline shocks (L95) | incumbent drug prices (P22) |
| number of shocks (C69) | incumbent drug prices (P22) |
| demand elasticity influenced by insurance coverage (G52) | incumbent drug prices (P22) |