Abstract
Economics developed a set of three degrees of price discrimination dependent on whether the seller targets individuals or groups, and whether buyers wish to use quantity rebates. The seller’s reason to price discriminate is to capture as much of the buyers utility surplus. Price discrimination is deemed unfair and immoral, and this is especially so in the market for pharmaceutical therapies. However, sometimes it can indeed be socially useful to price discriminate as the practice, under circumstances, enhances efficiency and social welfare.
The market for pharmaceuticals is a non-typical market as irreversible costs of research and development form the brunt of the cost structure. As pharmaceutical companies are driven by profit and bounded by patent expiration dates, discriminatory pricing schemes are necessary to recover investment costs of research and development as quickly as possible. The first degree of price discrimination consists of perfect, individually targeted, price/quality combinations that fully extract consumers’ surplus. The second-degree price discrimination consists of quantity rebates. The third degree of price discrimination is based on group targeting according to the group average willingness to pay.
We introduce a fourth degree of price discrimination based on qualitative features of pharmaceuticals on a market for antiviral drugs. We use the SVR as an example of quality differentials causing market price differentials. The fourth type of discrimination would be of particular interest to the pharmaceutical industry and health management organisations as it introduces non-linear price-quality combinations.
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Notes
- 1.
An opportunity cost is the cost of the next best alternative. For more on opportunity costs see Mance et al. (2015a).
- 2.
For a survey on European pricing schemes, see: Garattini et al. (2016).
- 3.
- 4.
Ge et al. (2009).
- 5.
Mance et al. (2015b).
- 6.
Mance et al. (2016a).
- 7.
- 8.
Mance et al. (2016a).
- 9.
Carlton and Perloff (2000).
- 10.
For a comprehensive survey on the application of EU competition law in the pharmaceutical sector, see Hull and Clancy (2016).
- 11.
Elek et al. (2017).
- 12.
For a comprehensive survey of price agreements in the EU pharmaceutical sector, see Van de Vooren et al. (2015).
- 13.
Mance et al. (2016b).
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Mance, D., Mance, D., Vitezić, D. (2019). Personalized Medicine and Personalized Pricing: Degrees of Price Discrimination. In: Bodiroga-Vukobrat, N., Rukavina, D., Pavelić, K., Sander, G.G. (eds) Personalized Medicine in Healthcare Systems. Europeanization and Globalization, vol 5. Springer, Cham. https://doi.org/10.1007/978-3-030-16465-2_14
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