Abstract: In this paper, we propose a multi-stage dynamic game model to investigate the comprehensive mechanism of government’s strategic innovation incentives policy, price regulation policy, and health insurance policy on pharmaceutical firms’ innovation incentives and pharmaceutical market performance. We find that price regulation does not necessarily decrease the innovation incentives for pharmaceutical firms, and firms’ innovation investment may achieve the social optimal level under a reasonable price regulation. In addition, matching price regulation to health insurance may achieve multi-win among pharmaceutical firms, providers, patients, healthcare providers and the government. We also show that government’s strategic innovation incentive policy may dual-regulate the innovation investment of pharmaceutical firms, and induce them to the first best allocation, as well as enhance firms’ profits and the social welfare. Last, improving health insurance welfare or decreasing the regulated price, will reduce the welfare effects of the strategic innovation incentive policy.

Key words: price regulation, strategic innovation incentives, medical insurance payment policies, pharmaceutical firm, market performance