A Markov-perfect equilibrium model of the impacts of price controls on the performance of the pharmaceutical industry


  • For their comments and suggestions, I would like to thank Ariel Pakes (the editor), two anonymous referees, Dan Ackerberg, Bill Comanor, Michelle Goeree, Joel Hay, Eric Helland, Hugo Hopenhayn, Marvin Lieberman, and Mark Showalter. I would also like to thank Pfizer Inc. and the John Randolph Haynes and Dora Haynes Foundation for providing financial support in the initial stage of this project.


I introduce a computable dynamic equilibrium model of the pharmaceutical industry, parameterize it using industry facts, and use it to predict what happens if the United States adopts price controls or one or more non-U.S. countries abandon their controls. The model generates implications for firm value, research and development (R&D), the flow of new drugs, and consumer welfare. I highlight the sensitivity of the results to alternative assumptions about R&D costs, market size, technological opportunities, consumer heterogeneity, the extent to which choices internalize prices, barriers to entry in R&D, the extent to which R&D outcomes are correlated, and the nature of the controls.