A new pricing mechanism for pharmaceutical supply chains: a game theory analytical approach for healthcare service

Abstract

ABSTRACT Health care accounts for a substantial amount of government spending and is one of the most vulnerable sectors of theeconomy. Having a significant role to play in saving lives, health care services are very valuable to customers, and without appropriatecontrol, the price of such services can be very high. Due to this, the government oversees a significant portion of healthcare costs andenacts special pricing controls. In this paper, exclusive domestic production of licensed brand drugs is studied by forming acooperative strategy between a domestic manufacturer and a foreign licensor. This strategy increases the manufacturer's income; as aresult, the government also expects discounts from the cooperative firm. A Nash bargaining solution based on cooperative gametheory is proposed to model the related pricing negotiations between partners. A real-life pharmaceutical company case study isapplied to the proposed model. The cooperative strategy indicates that the market share of the licensor in the local market and thereturn on capital of the local licensee manufacturers positively affect the equilibrium price at a lower price than the new equilibriumprice, the foreign company will not benefit from the coalition significantly and will not have any incentive for it.