Many people think that setting the price for drugs should be straightforward, following the basic principles of demand and supply. However, while this general rule often applies, the reality of determining the exact prices of drugs can be quite complex. This concept is effectively demonstrated in the following video:
Considering these challenges, it's crucial to grasp how prices in the market move together. This understanding is particularly valuable for policymakers. It helps them see not only the direct impact of their legislative actions on a specific drug but also the effects on its substitutes and competitors. Moreover, this insight is key to determining whether the pharmaceutical market adheres to a Ramsey pricing strategy or if other factors, like parallel trading, play a significant role.
What does this all mean? Let's break it down: Ramsey pricing is a strategy often expected to be used in pharmaceutical markets. It suggests that the higher the sensitivity of a product to price changes (its elasticity), the lower its price markup should be. So, if a drug's price significantly affects its demand, its price markup is expected to be smaller.
If evidence doesn't support the presence of Ramsey pricing, it might indicate that other factors, like parallel trading, influence price determination. Parallel trading involves speculating on pharmaceutical prices and has been a persistent issue that governments have struggled to address effectively.
Therefore, a study that can pinpoint the presence of parallel trading and accurately determine the elasticities of pharmaceutical products represents a significant advancement. It moves us closer to identifying and quantifying this problematic practice, shedding light on the complexities of pharmaceutical pricing.
Still the one above is an overview and more question emerges...for instance...
How can we determine price elasticities exactly?
Are there differences between generics and branded?
Which therapeutic classes have higher elasticities and why?
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