Learning from Innovation in the Health Industry
Edited by Marco R. Di Tommaso and Stuart O. Schweitzer
Chapter 4: A Hedonic Model of Pricing of Innovative Pharmaceuticals
4. A hedonic model of pricing of innovative pharmaceuticals* William S. Comanor, Stuart O. Schweitzer and Tanja Carter 1 INTRODUCTION The Health Industry Model, as described in Chapter 1 of this volume, suggests that investment in health is useful, not only for its beneﬁcial eﬀect on a population’s health status, but also because of its positive eﬀect on health-related research and development and spillovers that beneﬁt other high-technology sectors. Investment in research and development, however, depends upon market conditions aﬀecting the potential fruits of these investments. Investment in R&D will be undertaken only if the investor expects that a new product, once brought to market, can be sold at a price that will cover its costs of development as well as its manufacturing costs. Without this expectation, there is little incentive to develop innovative products. In the case of pharmaceuticals, the market is essentially worldwide, even though it is dominated by the industrialized countries. In principle, prices in a particular country should matter to a seller only in proportion to that country’s worldwide market share. Nevertheless there appears to be a correlation between pharmaceutical prices in a country and the level of its pharmaceutical research and development activities. This discussion points out the importance of prices in inﬂuencing the investment in innovation in the pharmaceutical industry, both in the aggregate and in particular countries. In many countries, drug prices are set by governmental or quasi-governmental agencies, often with reference to other prices, either...
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