Abstract
We study strategic interaction among countries in pharmaceutical price regulation resulting from innovation-related spillovers. In our theoretical model, regulators’ pricing decisions affect consumer surplus both directly and indirectly, via firms’ R&D policies. We characterise two types of equilibrium, depending on whether countries price at, or above, the minimum level the industry is willing to accept to serve the market. Our results suggest that the combination of these two equilibria may imply a U-shape relationship between market share and pharmaceutical prices. We find empirical support for this hypothesis, using price data for 83 cancer drugs in 23 OECD countries. Our results contribute to the ongoing academic debate about the relationship between market size and prices, as well as the current policy debate about the merits of using supranational procurement policies to lower prices. In particular, we show that joint procurement can lead to lower or higher prices according to the sizes of the domestic markets which join together to create a single purchasing authority.