Pharmaceuticals, Prescription Plans, and Promoting Progress
Grinols, Earl L.
Henderson, James W.
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Monopoly response to buyers who pay fraction c of the product cost is to raise the buyer price for the initial quantity q0 from p0 to 1/c p0, and adjust to a different price and quantity only if profits are thereby raised further. A 25% prescription drug plan co-payment provision, for example, magnifies the pharmaceutical patent holder’s profits more than a fourfold increase in price at the original output would do. This is detrimental to the adoption and use of prescription drug plans. In addition to the appearance of abusing a prescription drug program, the inducement to patentable pharmaceutical research and development (R&D) cannot be optimal both before and after such a plan’s institution. Possibly it is optimal in neither. This paper describes an efficient incentive plan for R&D that does not depend on monopoly and thus is not an impediment to co-pay provisions that might be part of a prescription drug plan.