Venue: The Fuqua School of Business, Duke University, 1 Towerview Drive, Durham, NC 27708-0120
Presentation
An Exploratory Analysis of the Dynamic Welfare Implications of Differential Pricing for Low-Dose Uses of Pharmaceuticals
The standard welfare analysis of differential pricing (price discrimination) reveals enhanced social and consumer welfare in commonly encountered situations. A special case of potential importance in the pharmaceutical market, however, occurs when new research is necessary to reveal the medical benefits that underpin some portions of the demand curve. If differential pricing is impossible, perhaps because of price controls or the inability of sellers to prevent arbitrage among buyers, sellers may lack the incentive to perform the research necessary to reveal the benefits of new uses for small doses of an established pharmaceutical. The practical relevance of this possibility has been revealed by two recent episodes, one involving an approved HIV drug that later found its best use as a small-dose adjuvant in combination with other HIV drugs, and the other involving the accumulation of anecdotal evidence that small doses of a cancer drug may be an effective treatment for the wet form of age-related macular degeneration. After working through the basic welfare theory of the relationship between differential pricing and low-dose R&D, this theoretical reasoning is applied to these two real-world situations. The results suggest that the ability of firms to engage in differential pricing could generate substantial gains in the dynamic efficiency of pharmaceutical R&D, eventually generating large gains in consumer welfare. These results are shrouded in uncertainty, however, due to the unpredictability of research on multiple uses of new drugs, in addition to the practical difficulties of engaging in differential pricing.