An empirical model of drug pricing and competition: a dynamic perspective

In this study we test the impact of competition and other market attributes on the pricing of pharmaceuticals. Three decades worth of market and pricing data were collected and the market for lipid-lowering agents used as a case study. Panel data and cross sectional methods were applied to develop two distinct econometric models: one dynamic longitudinal model continuously following molecules’ prices; and one static launch price model considering market conditions at time of launch. The results show a consistent element of price competition reflected both in the launch price of new drugs and in the price observed throughout the molecules’ lifecycle. Prices vary greatly depending on market conditions such as the number of competitors, the degree of market concentration, and the existence of generic versions of the molecule. The results also show that a dual competition model is in place with market attributes affecting prices differently depending on the therapeutic proximity of available competitors.