Price competition in the chinese pharmaceutical market
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Price competition in the chinese pharmaceutical market Y. Richard Wang∗
C
Springer Science + Business Media, LLC 2006
Abstract We study price competition between high-quality global products and low-quality local products in a developing country, i.e., China, Nearly all previous studies on pharmaceutical price competition focused on developed countries with bioequivalent generics. In China, local generic products are not bioequivalent and are deemed of lower quality, while global products in the same class are considered similar in quality and better substitutes. We hypothesize that local generic competition drives down local product price but not global product price. In addition, we hypothesize that therapeutic competition among similar global products lowers global product price. Our empirical results support both hypotheses. Number of local generic competitors has a significantly negative effect on local product price but no effect on global product price, while number of global therapeutic competitors has a significantly negative effect on global product price. Policy changes that encourage bioequivalent local products and accelerate global product approvals will enhance price competition in China. Keywords Pharmaceutical price competition . Generic competition . Therapeutic competition . Pharmaceutical market in developing countries JEL Code I11, L11
Introduction Previous economic studies on pharmaceutical price competition found wide variations across major developed countries. In the mostly free-pricing US, the price of originator products ∗ Disclosure: This project was funded by AstraZeneca Pharmaceuticals. The views expressed in this article do not represent those of AstraZeneca Pharmaceuticals.
Y. R. Wang () Public Policy Department, AstraZeneca Pharmaceuticals 1800 Concord Pike, Wilmington, DE 19850-5437; Leonard Davis Institute of Health Economics, University of Pennsylvania e-mail: [email protected] Springer
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remains unchanged or even rises slightly in response to generic competition, while the price of generic products decreases with more generic entries and presumably moves toward the marginal cost of production (for example, see Caves, Whinston and Hurwitz, 1991; Grabowski and Vernon, 1992; Frank and Salkever, 1997). Consequently, generics typically account for the bulk of molecule sales shortly after patent expiration in the US. In an extensive cross-country comparison, Danzon and Chao (2000) found that generic competition leads to lower prices in unregulated or less regulated countries such as the US, the UK, Canada, and Germany but is ineffective in countries with strict price regulation such as France, Italy, and Japan. However, their evidence on therapeutic competition, i.e., between products of similar molecules in the same class, is less conclusive due to selection biases associated with entry decisions (Danzon and Chao, 2000). The pharmaceutical market in developing countries differs from that in developed countries in many ways (Kremer, 2002). Beyond lo
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