Kurt R. Brekke (), Dag Morten Dalen () and Odd Rune Straume ()
Additional contact information
Kurt R. Brekke: Dept. of Economics, Norwegian School of Economics and Business Administration, Postal: NHH, Department of Economics, Helleveien 30, N-5045 Bergen, Norway
Dag Morten Dalen: Dept. of Economics, BI Norwegian Business School, Postal: BI , Department of Economics, Nydalsveien 37, 0484 Oslo, Norway
Odd Rune Straume: Dept. of Economics, University of Bergen, Postal: UiB, Department of Economics, Fosswinckelsgate 14, 5007 Bergen, Norway
Abstract: Pharmaceutical expenditures are rising rapidly, driven in part by the innovation of highly effective but very expensive drug therapies that treat multiple diseases. While these drugs offer substantial health benefits, payers face a critical trade-off between cost containment and access to new medicines. A key policy question is whether producers should be restricted to uniform pricing or allowed to use indication-based pricing, where prices vary across patient groups. We analyse how this choice affects drug producers' incentives to invest in new indications, their pricing strategies, and the resulting surplus for health plans. In a monopoly setting, indication-based pricing yields higher profits and thus strengthens incentives to invest in new indications, while the payer prefers uniform pricing unless the fixed investment costs cannot be recouped. The novelty of our study lies in showing that monopoly-based insights may not hold under competition. Specifically, we identify a softening-of-competition effect, where a uniform pricing restriction serves as a credible commitment to raise prices in the competitive market. In this case, the health plan generally favours indication-based pricing to reduce costs. However, an exception arises, where both parties prefer uniform pricing, if the uniform price generates significant health gains through demand expansion in the original monopoly market. Our findings suggest that neither pricing scheme is universally optimal, underscoring the need for case-by-case assessments across drug classes.
Keywords: Pharmaceuticals; Innovation incentives; Payer pricing schemes
Language: English
55 pages, January 8, 2025
Full text files
3171636Full text
Questions (including download problems) about the papers in this series should be directed to Synne Stormoen ()
Report other problems with accessing this service to Sune Karlsson ().
RePEc:hhs:nhheco:2025_001This page generated on 2025-02-10 09:49:47.