Challenge or opportunity? Impact of a two-invoice mechanism on pharmaceutical supply chains with channel promotion

Abstract

Two-invoice mechanism (TIM) was introduced by the Chinese government with the purpose of reducing pharmaceutical prices. This paper studies the impact of the TIM on a pharmaceutical supply chain consisting of a manufacturer, buyer, and agent (in the absence of a TIM) or a third-party company (in the presence of a TIM). Considering the promotion effort, we establish game theoretical models for different supply chain structures. The pharmaceutical agent conducts channel promotion in the absence of the TIM. However, under the TIM, the agent is ruled out, and channel promotion is thus performed by the manufacturer or third-party company. Interestingly, we find that although the original intention of the TIM is to reduce pharmaceutical prices, it may fail to do so when channel promotion is performed by the manufacturer. Nevertheless, the TIM increases pharmaceutical demand and consumer surplus, thus benefiting the public. Moreover, whether the manufacturer can benefit from the TIM depends on the promotion mode and its investment cost of setting up a promotion channel. Particularly, when the manufacturer performs self-promotion and the investment cost is high, the profit is reduced. In contrast, the buyer always benefits from the TIM. Finally, we propose coordination schemes based on revenue-sharing contracts (RSCs) and performance-based contracts (PBCs) to improve the performance of the supply chain with the TIM.