Biomedical Engineering Reference
In-Depth Information
a particular remedy is a strong determinant of its market price with some compounds
commanding 2 or 3 times the price of existing treatments. Drugs with a largely
duplicative effect and less of a therapeutic gain are priced comparatively at launch.
In a practical review of the pharmaceutical pricing question, Kolasa (
2009
) sug-
gests this is a simple matter of perceived benefi ts of the drug determined in conjunc-
tion with what the doctor is willing to prescribe and or the consumer (or their
insurance company) is willing to pay.
On the question of dynamic drug pricing in the face of competitive entry from
generics, the marketing literature is less developed. Eliashberg and Jeuland (
1986
)
use time period economic models to analyze dynamic pricing strategies for incum-
bents based on their “myopia” with respect to the anticipation of competitive
entrants. Their models explore the optimal pricing strategy of a fi rm that introduces
a new product fi rst and anticipates competition in the future. Their model explores
two temporal periods one during the monopoly period, and another during the duo-
poly period. Also considered is the effect of a second entrant during the duopoly
period. Their fi ndings indicate that for those fi rms that anticipate competitive entry
and are hence “non-myopic,” it is better to price the drug higher than those fi rms
that do not anticipate competitive entrants (characterized as “myopic”).
From the economics perspective, Kamien and Zang (
1999
) use analytical models
to examine pricing options for fi rms that approach patent expiry. As previously
described, most incumbents have the opportunity to introduce their own generic into
the market at any time, including pre-expiry. The branded drug may stay in the market
and experience a price increase while the “own generic” can be sold at a substantial
discount (Jain
2010
). As modeled, the pre-expiry fi rst mover introduction of a dis-
counted “own generic” coincident with a price increase on the incumbent branded
drug can lead to a market-expanding effect. Both brand loyal and cost conscious con-
sumers are reported to benefi t from this kind of two pronged approach. This approach
while appealing in theory does not fully consider the potential impact of the cannibal-
ization on sales of the branded drug by the “own generic.” In the context of the hista-
mine blocker antacid medicines market the launch of a cheaper OTC variant post
expiry was viewed to cannibalize sales of the branded drug (Berndt et al.
2003
,
2007
).
Jain (
2010
) describes an integrated product and pricing methodology to address
the challenges of cost-based competition also known as the “sandwich” approach
(Jain
2010
). Figure
9.2
illustrates the fundamentals. An innovator enjoys an incum-
bent position with the associated
quality
and
price
attributes of its offering (q, p).
Price-based competition enters the market at time
t
entry
offering products of similar
quality q but at a discounted price, p−. If the original innovator has the ability to
differentiate its offerings on the quality dimension, it can launch products with both
higher (q+, p+) and lower (q−, p−) price/quality attributes relative to the original
offering. If the incumbent can maintain the low price (p−) position, it effectively
sandwiches the competition's maneuverability on quality and price, locking them
into middle market segments. The “sandwich” approach works for companies that
proactively anticipate cost-based competition (generic entry in pharmaceuticals)
and companies that are surprised and must react. The author further explains how
this approach has been employed in multiple market environments (Jain
2010
).
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