Drug Price Control Policy And Access To Malarial Drugs In India

Abstract

This dissertation investigates the effects of a drug price control policy implemented in India on consumer welfare. Methodologically this relates to estimation of endogenous product choice game of multi-product firms in a static framework. It builds on the existing literature on price control policy and literature on endogenous product choice and seeks to make two contributions. First, through empirical analysis, it demonstrates that not all price controls are equal. In fact, some price control policies could actually hurt consumers relative to the situation with no price controls. This is because, while price controls lower prices and make pharmaceutical products more affordable, they might backfire if firms respond to these policies by withdrawing from the market, which would result in reduced access. On one hand, unregulated prices, if too high, preclude most consumers from purchasing these drugs. On the other hand, regulated prices, if too low, result in few products being offered on the market. Second, it builds on the Moment inequality literature, and proposes a solution to a selection problem that arises while estimating cost parameters using (observed) firms' endogenous choices of product portfolio. In this analysis, we focus on drugs that cure malaria, an important neglected disease in the context of the Indian pharmaceutical market. We use a novel and unique dataset which features detailed region level sales and price data. We exploit the significant demographic heterogeneity across different regions in India to estimate a two stage game, where firms endogenously make product entry and exit decisions across different markets as well as fix prices of the offered products. The richness of the model requires us to confront econometric challenges associated with multiplicity of equilibria, endogeneity, and inference in partially identified models, as well as computational challenges associated with the high dimensionality of the problem. Our estimation results show that there is substantial variation in demand elasticities and willingness-to-pay across different regions in India, and that firms incur significant fixed costs for making the developed drugs available in the local markets. Moreover, fixed costs are heterogeneous across firms and across regions. The results of our counterfactual analysis show that under price control, small domestic firms and foreign firms withdraw their products, and markets become more concentrated. In most cases, only the big-domestic firms continue producing the drugs. Depending on the level of price control, the loss in consumer welfare due to products withdrawal may exceed the gain in consumer welfare resulting from lower prices, leading to an overall decrease in consumer welfare.