Unintended consequences of National centralized volume-based drug procurement policy in China: a game theory-based...

The pharmaceutical industry plays a pivotal role in the healthcare economy, with drug quality and pricing being critical to consumer welfare. China's government has implemented National centralized volume-based drug procurement(NVBP) policy, aiming to reduce medication costs through bulk purchasing. While existing research confirms its price-reduction effects, unintended consequences regarding pharmaceutical quality incentives remain overlooked. This study investigates how the NVBP policy reshapes firms' quality-pricing strategies, addressing a critical gap in policy evaluation.

Game-theoretical model is constructed to simulate interactions between two pharmaceutical firms with distinct technological capabilities before and after China's National volume-based procurement (NVBP) policy. Prior to the policy, the Hotelling model's spatial competition is reinterpreted as a quality-preference spectrum After the policy, drugs are standardized through consistency evaluation, and competition reduces to pure price competition as in the Bertrand model. Then a double-envelope bidding game is introduced where the government sets a minimum quality standard and firms bid on price. After winning the bid, firms need to decide the production strategy.

Before NVBP policy implementation, equal-quality price differences depend solely on technical parameters. Under endogenous quality, a firm's quality rises with its own technology; the technologically superior firm charges a higher price, but a weaker firm facing a superior rival lowers its price. After NVBP policy implementation, during the bidding time, if both firms pass consistency evaluation, the winning bid price falls, but quality may drop below pre-NVBP levels. If the low-tech firm fails, the high-tech firm gains monopoly pricing power and raises prices. During the production time, some unintended consequences may occur, such as quality risk and supply disruption risk.

The implementation of NVBP policy could lower drug prices and improve access, but it may also generate unintended consequences. Low standards induce price competition and reduce quality investment, while high standards may create sole-supplier monopoly. Excessively low bids pose quality or supply risks. Policy should calibrate standards, use tiered incentives, and strengthen surveillance, but empirical validation remains needed.