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Pricing above value: Selling to a market with selection problems.
1Tilburg University, Department of Economics, Tilec, Netherlands; CEPR, United Kingdom.
Journal of Health Economics
|March 6, 2024
Summary
Selection incentives in downstream markets can inflate upstream prices, leading to drugs costing more than their value to consumers. This can also incentivize reducing market size, such as with personalized medicine.
Area of Science:
- Health economics
- Market dynamics
- Pharmaceutical industry analysis
Background:
- Downstream market selection incentives can distort upstream pricing mechanisms.
- Pharmaceutical markets face unique challenges due to health insurance and consumer selection.
Purpose of the Study:
- To analyze how selection incentives in downstream markets affect upstream prices in the pharmaceutical sector.
- To identify conditions under which drug prices may exceed their actual treatment value.
- To examine the incentive to reduce market size, exemplified by personalized medicine.
Main Methods:
- Economic modeling of pharmaceutical markets with selection problems.
- Analysis of pricing strategies in the presence of health insurance.
- Specification of conditions for price distortion.
Main Results:
- Upstream prices can be distorted by downstream selection incentives, exceeding final consumer value.
- Drugs may be sold at prices higher than their therapeutic treatment value under specific market conditions.
- A significant private incentive exists to reduce overall market size, potentially through personalized medicine.
Conclusions:
- Selection problems in health insurance markets can lead to inefficient drug pricing.
- Pharmaceutical pricing is influenced by market structure and insurance dynamics, not solely by treatment value.
- The pursuit of personalized medicine may exacerbate market size reduction, impacting overall access and cost.
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