Vincenzo Atella, Jay Bhattacharya M.D., Ph.D., Lorenzo Carbonari
This article examines the relationship between drug price and drug quality and how it varies across two of the most common regulatory regimes in the pharmaceutical market: minimum efficacy standards () and a mix of and price control mechanisms ( + ).
Our primary data source is the Tufts‐New England Medical Center‐Cost Effectiveness Analysis Registry which have been merged with price data taken from (for the United States) and (for Italy).
Through a simple model of adverse selection we model the interaction between firms, heterogeneous buyers, and the regulator.
The theoretical analysis provides two results. First, an regime provides greater incentives to produce high‐quality drugs. Second, an + mix reduces the difference in price between the highest and lowest quality drugs on the market.
The empirical analysis based on United States and Italian data corroborates these results.