The pricing of breakthrough drugs: Theory and policy implications

Moshe Levy*, Adi Rizansky Nir

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

10 Scopus citations

Abstract

Pharmaceutical sales exceed $850 billion a year, of which 84% are accounted for by brand drugs. Drug prices are the focus of an ongoing heated debate. While some argue that pharmaceutical companies exploit monopolistic power granted by patent protection to set prices that are "too high", others claim that these prices are necessary to motivate the high R&D investments required in the pharmaceutical industry. This paper employs a recently documented utility function of health and wealth to derive the theoretically optimal pricing of monopolistic breakthrough drugs. This model provides a framework for a quantitative discussion of drug price regulation. We show that mild price regulation can substantially increase consumer surplus and the number of patients who purchase the drug, while having only a marginal effect on the revenues of the pharmaceutical company.

Original languageAmerican English
Article numbere113894
JournalPLoS ONE
Volume9
Issue number11
DOIs
StatePublished - 25 Nov 2014

Bibliographical note

Publisher Copyright:
© 2014 Levy, Rizansky Nir.

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