Drug price regulation under consumer moral hazard. Two-part tariffs, uniform price or third-degree price discrimination?

Felder, Stefan
December 2004
European Journal of Health Economics;Dec2004, Vol. 5 Issue 4, p324
Academic Journal
journal article
Drug price differences across national markets as they exist in the EU are often justified by the concept of Ramsey prices: with fixed costs for R&D, the optimal mark-ups on marginal costs are inversely related to the price elasticity in the individual markets. This well-known result prevails if consumer moral hazard is taken into account. Contrary to the situation without moral hazard, the uniform price does not necessarily dominate discriminatory pricing in welfare terms. The two-part tariff is a better alternative as it allows governments to address moral hazard. A uniform price combined with lump-payments reflecting differences in the willingness to pay and the moral hazard in member states appears to be an attractive option for a common EU drug market.


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