Research Funding and Price Negotiation for New Drugs

GATE Working Paper No. 1902

16 Pages Posted: 23 Jan 2019

See all articles by Francesca Barigozzi

Francesca Barigozzi

Università di Bologna

Izabela Jelovac

University of Lyon 2 - Groupe d'Analyse et de Théorie Economique (GATE)

Date Written: December 20, 2018

Abstract

Pharmaceutical innovations result from the successful achievement of basic research, produced by an upstream lab, and applied research, produced by a downstream lab. We focus on the negotiation process to finance basic research by setting public and private grants and to agree on the final price of a new drug. We show that exclusive funding of basic research is desirable. To increase consumers’ surplus and reduce negotiated prices for new drugs, basic and applied research should be integrated if the lab producing applied research has a relatively large bargaining power. When instead the health authority has the larger bargaining power, integration with the producer of basic research increases negotiated prices for new drugs and should be avoided, unless the gain in bargaining power after the integration is extremely high.

Keywords: pharmaceutical innovation, drug prices, negotiation, basic research, applied research

JEL Classification: D8

Suggested Citation

Barigozzi, Francesca and Jelovac, Izabela, Research Funding and Price Negotiation for New Drugs (December 20, 2018). GATE Working Paper No. 1902, Available at SSRN: https://ssrn.com/abstract=3319750 or http://dx.doi.org/10.2139/ssrn.3319750

Francesca Barigozzi (Contact Author)

Università di Bologna ( email )

Via Zamboni, 33
Bologna, 40126
Italy

Izabela Jelovac

University of Lyon 2 - Groupe d'Analyse et de Théorie Economique (GATE) ( email )

93, chemin des Mouilles
Ecully, 69130
France

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