Pricing dynamics in the pharmaceutical industry

Pricing behaviour has traditionally been approached from the concept of long-term static equilibrium. This paper argues that this approach is inappropriate, at least with respect to the pharmaceutical market, because new innovation, and patent expiry lead to a continually changing environment. A theoretical analysis argues that price change will depend on the age of the therapeutic class, the degree of brand loyalty, the extent to which it is sold ‘over the counter’ rather than on prescription, and measures of competition. The empirical results, based on an analysis of the leading twenty five therapeutic class of pharmaceuticals in the USA, the UK, West Germany and France over the period 1981–1988, tends to support the theoretical conclusions. Although it would appear that government controls in the UK are distorting profit maximizing behaviour more than in the other three countries.