The Impacts of Price Controls on the Performance of the Pharmaceutical Industry

This paper introduces a dynamic equilibrium model of the research-based pharmaceutical industry and parameterizes it using industry facts. In the model, imposing price controls in the U.S. reduces firm value, R&D, the flow of new drugs, and the net present value of consumer welfare in the U.S. and globally. Removing price controls in one or more non-U.S. countries increases firm value, R&D, the flow of new drugs, and consumer welfare globally, but reduces consumer welfare in the countries changing their policies. The results explain why the U.S. resists adopting price controls even while non-U.S. countries resist abandoning price controls. JEL Codes: C61: Dynamic Computational Models; C73: Dynamic Games; D61: Welfare Analysis; I18: Health Policies; L65: Pharmaceutical Industry; O38: Innovation Policies