A pharmaceuticals pricing problem

Abstract

Pharmaceuticals Market, both globally and in Turkey, is subject to a material tendency in curtailing health expenditures mainly through two instruments; generic drug utilization and policy changes regarding pricing and reimbursement. Although government agencies pay back ~90% of pharmaceuticals expenditures, as a result of policy changes and current market dynamics patients may face an out of pocket extra co-payment for brand-name drugs. In this challenging market, some important questions emerge regarding the extra co-payment such as how does demand change with the existence of an extra co-payment, how much do patients substitute to generics after facing extra co-payment, how do firms may set the prices optimally so manage the trade off between price and quantity sold. As the novelty of this thesis, we try to model the demand function through a simple application for an example drug, named Lipitor. According to the estimation for the demand function, we found that “extra co-payment” is a significant factor on the market share. The market share decreases with an increase in extra co-payment as patients do switch to generics. We also estimated the price elasticity. Then we solved the firm’s optimization problem which maximizes revenue subject to the firm’s only control variable, extra copayment. A core finding is that firms should not necessarily minimize or zero extra co-payment as they do not compensate that loss with the corresponding increase in the market share. Instead firms should optimize the extra co-payment.