Strategic Interaction in Pharmaceutical Price Regulation: With or Without U?

We study strategic interaction among countries in pharmaceutical price regulation resulting from innovation-related spillovers. In our theoretical model, regulators’ pricing decisions affect welfare both directly and indirectly, via firms’ R&D policies. We characterise two types of equilibrium, depending on whether countries price at, or above, the minimum level the industry is willing to accept to serve the market. The combination of these two equilibria may imply a U-shape relationship between countries’ pharmaceutical prices and relative market size. We find support for this hypothesis, using data for 83 cancer drugs in 23 OECD countries. Our results contribute to the academic debate about the relationship between prices and market size, as well as the policy debate about using supranational procurement policies to lower prices. In particular, we show that joint procurement can lower or raise prices according to the sizes of the domestic markets which join to create a single purchasing authority.