Founded on economic principles Essay Example

Founded on economic principles Essay Example Founded on economic principles Paper Founded on economic principles Paper The objective of Lu and Comanor’s study is to investigate on the factors that affect the prices of pharmaceutical products at their introduction to the market throughout their life cycle. Their work was founded on economic principles and supported by a regression analysis of empirical data on new drugs introduced from 1978 to 1987. Data on the new molecular entities that were introduced before 1984 were sourced from the Food and Drug Administration (1985), while the rest were from a study of drugs lags between the United States and the United Kingdom. The drugs used as part of the empirical data were subject to the FDA ratings, wherein Class A represented drugs that provided valuable therapeutic gain, Class B were drugs that were modestly effective, and Class C were drugs that gave little or no therapeutic benefits. : One of the main findings was the therapeutic significance of the pharmaceutical products was directly proportional to its launch price. In fact, Class A and B drugs were launched into the market at a premium while most of Class C drugs were at a discount. These findings satisfied previous research, such as Reekie’s (1978). According to Reekie, drugs that were therapeutically advanced were priced higher than substitutes already in the market while imitators cost cheaper. This pricing behavior has led Reekie to conclude that an even price competition in the market cannot be completely possible due to the presence of such advanced patented drugs. He observed, however, that through time, prices of these advanced drugs decline while those of generic or imitation drugs increased (Lu Comanor 108, 111). The empirical data also reveal, Class A drugs have the least imitators while Class C drugs have the most. But despite the production of these supposed imitators, the rate of imitation is not as rampant as those in other industries. In fact, branded rivals still thrive in the market and they cause the decline in the launch prices of fellow innovative drugs, whereas generic substitutes produce the opposite effect. This pricing behavior reflects the findings Dean’s (1969) study wherein he defines two (2) pricing techniques for new products, namely skimming and penetration pricing. Skimming pricing is positioning new advanced therapeutic products at premium prices that eventually decline, and penetration pricing is introducing less innovative products at lower prices and raising them over time. In essence, results of the study show that advanced therapeutic products enter the market under skimming pricing while imitation and other less innovative drugs do so under penetration pricing (Lu Comanor 108, 111). Aside from the pricing strategies, it was interesting to learn how the nature of the diseases also serves as price determinants for the drugs intended to treat them. According to the text, the repurchase or sustainability in demand for the drugs is, somehow determined by whether it is used for acute or chronic cases. So for drugs that are intended for chronic cases, such as those of the elderly, the strategy applied is more price-sensitive. This aspect of the pricing strategy is interesting in that aside from following the dynamics of price and demand, it benefits consumers that continuously need such therapeutic products for their health. While the text effectively incorporates economic principles with the technicalities of the pharmaceutical industry, the discussion on pricing would have been more substantial if the cost side of the products were also considered. As prices of drugs and other health instruments are often topics of debate, it would have been more interesting if the text broadened the discussion to include the price structure of the products and a forecast on the direction of the pharmaceutical industry during this time when the health crises is most prevalent. Reference Lu, John Z., and Comanor, William S. Strategic Pricing of New Pharmaceuticals The Review of Economics and Statistics, Vol. 80, No.1 (Feb., 1998), 108-118