Non-Tariff Barriers and Bargaining in Generic and Off-Patent Pharmaceuticals

Abstract

Pharmaceutical prices are widely dispersed across countries with comparable quality standards. We study two elements of this dispersion; non-tariff barriers and buyer bargaining power. Under monopoly, generic drug prices are 3-4 times higher in the United States. With 6 or more competitors, generic drug prices are similar across countries. Motivated by this, we use a bargaining model to examine two policy solutions to reduce drug prices. First, we remove non-tariff barriers to increase the number of competitors through a reciprocal approval arrangement and market entry. Second, we explore the US government s unexploited purchasing power to negotiate drug prices. Regarding Medicaid, the first measure can reduce total expenditures by 8% and the second by 18%. There is very little additional savings from doing both procedures in tandem.