TAILIEUCHUNG - Lecture Health economics - Chapter 12: The pharmaceutical industry (Part 2)

Lecture Health economics - Chapter 12: The pharmaceutical industry (Part 2). This chapter presents the following content: Pharmaceutical industry conduct, pricing behavior, promotion strategies, Are DTC ads reaching consumers? Ads are read and acted upon, misconceptions abound,. | The Pharmaceutical Industry Part 2 Professor Vivian Ho Health Economics Fall 2009 Pharmaceutical Industry Conduct Pricing Does more intense competition drug prices? Promotion Does drug advertising promote or impede competition? Product innovation Are large firms necessary for drug innovation? Preview: Empirical evidence indicates that competition is at work, but the industry does not exhibit perfect competition. Pricing Behavior Can the brand-name firm maintain its price once its patent expires and generics enter? After patent expiration, each 10% increase in the price differential for brand-name drugs relative to generics resulted in only a .5% drop in market share for the brand-name drug. (Hurwitz & Caves, 1988) Average price differential between brand-name and generic firms = 127%, but brand name market share = . Pricing Behavior The longer the brand-name drug’s effective patent length, the more market share it preserved after patent expiration. The arrival of an additional supplier was estimated to reduce the brand-name drug’s market share by percentage points. Pricing Behavior Branded drugs’ prices 11% 2 years after generic entry. (Grabowski & Vernon 1992) Yet brand-name drugs lost 1/2 of market share. Average market price fell to 79% of pre-entry price. Pricing Behavior Brand-name firms segment the market. Remaining customers relatively price insensitive. Inelastic demand curve allows them to maintain price. These 2 studies suggest that generic drug prices are substantially lower than brand-name prices. Express Scripts 2007 Drug Trend Report Promotion Strategies Promotion Magnitude: Research-based firms spend as much as 20-30% of sales on promotion. 70% pharmaceutical salespersons (detailing). 27% advertising. 3% direct mail. Impact: 22,000 drugs on market timely, valuable information. May impede competition.

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