Price regulation, medicare payment policy and pharmaceutical firm's innovation incentives

Abstract

Abstract: This paper studies collaborative decisions on innovation investment and pricing of a pharmaceutical firm in a complete competitive market, considering price regulation and medicare policy simultaneously. We explore interactions between price regulation and medicare payment on the firm's innovation investment and pricing mechanisms. The results are as follows:first, new medicine's pricing mechanisms are determined by the ceiling price and the medicare policy jointly, especially the price of the new medicine is not able to indicate its innovation level if the medicare payment is low; second, lowering the medicare payment appropriately will reduce the firm's opportunistic behavior in innovation; third, impacts of price regulation on pharmaceutical firm's innovation investment are influenced by the medicare policy and firm's own innovation ability collectively; and finally, price regulation does not necessarily result in innovation underinvestment and it might correct the distortion of innovation investment allocation and enhance innovation investment of the pharmaceutical firm with medium innovation ability if the medicare payment is high.

Key words: price regulation, medicare policy, innovation investment, pricing mechanism, pharmaceutical firms

CLC Number:

F270-05

Zhang Xinnxin, Hou Wenhua, Shen Chenglin. Price regulation, medicare payment policy and pharmaceutical firm's innovation incentives[J]. Science Research Management, 2015, 36(12): 120-128.

References

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