The functions of known to be inaccurate prices in markets: A cross-country comparison of pharmaceutical list pricing

Abstract

Economic theory assumes accurate price information to be readily available in markets. In real markets, however, actual price information can be private and confidential, forcing buyers to rely on official list prices despite their known inaccuracy in representing actual prices. Little is known about the workings of such markets. In a comparative study of four national markets for specialist pharmaceuticals, we find differences in how list prices are set, used, and communicated. Based on this, we conclude that list prices are indexical entities whose relation to actual prices varies consistently yet unsystematically across markets, making them poor proxies for actual prices. Despite this, buyers use list prices as indicators of willingness to pay and to generate images of successful market outcomes. Finally, we conclude that price formation in markets where actual prices remain opaque is linear and non-recursive, giving such markets a relational character irrespective of the goods being exchanged.