Price and Quality Competition in the United States Drug Industry

Abstract

This paper will examine the pricing conduct of the United States pharmaceutical industry for the period I 958-75. We will attempt to provide empirical support for the above statements. We have cited these comments, not because they are straw men but rather because they are typical of many informed critiques of the industry's pricing behaviour. Lall, in fact, in reference to the first point, suggests that it represents 'the consensus of opinion among economists. . .' [i 2, p. I48]. Our conclusions will have implications for understanding how non-competitive the industry is in terms of pricing policies. They will also show the extent to which the market fails to react to and/or fails to determine such behaviour. The results will have special interest for those who believe that pharmaceutical prices are not effectively regulated by market forces and that therefore public policy needs to be directed towards price control in this industry. Since the results will refer to an industry whose structure is well documented they will be of general relevance to all economists interested in the discussion surrounding the debate about structure, conduct and performance. Section II will investigate the extent to which there is a conflict between therapeutic quality and marketability. Conventional value theory suggests there should be none. Prices of new drugs will be determined by market * The research on which this paper is based was funded by the Centre for the Study of Drug Development, University of Rochester. Fred Thomas and Robin Day provided invaluable aid in the collection and processing of data. Helpful criticisms of an earlier draft have been received from Vassilis Droucopoulos, Iain H. McNicoll, Sam Peltzman and Robert B. Helms. The responsibility for the results and interpretation, however, rests solely with the