The Price Effect of Drug Price Ceilings: Intended and Unintended Consequences

Policy makers in many developing countries use maximum price or markup policies to control pharmaceutical costs, which represent 20%–60% of their overall healthcare expenditure. We study the price effect of price ceiling policies by exploiting a major policy shift in China: the elimination of longstanding ceilings on retail drug prices. We collect weekly price and characteristics data on more than 4,500 drug stock keeping units (SKUs) from a leading pharmacy chain. By comparing the rate of discontinuous price jumps across drugs with and without price ceilings during the years before and after the policy change, we find that while price ceilings are effective in containing the prices of some drugs, they can lead to higher prices for others, particularly if the ceilings are set at the national level irrespective of local economic conditions. About 5% of nationally controlled drugs (or more than 125 drugs) had inflated prices because of price ceilings, with an average price inflation of 10%. We attribute this perverse price effect to focal point pricing and asymmetric information about production costs. Further supporting this view, we find the perverse price effect most prominent in lower-income regions where the centrally set price ceilings are arbitrarily high considering their poorer economic conditions. Moreover, drugs with highly concentrated production and less elastic demand face heightened risks of inflated prices under price ceilings. Finally, based on a sample of drugs with available price ceiling data, we find that drugs with manufacturer-specific ceilings are 100% more likely to be priced at or near their ceilings and 70% more likely to experience price drops once the ceilings are removed compared with other drugs with regular ceilings. Overall, this paper documents the unintended perverse effect of price ceilings in pharmaceutical markets and sheds lights on the ongoing debate of drug price regulation. This paper was accepted by Stefan Scholtes, healthcare management.

Tenancy Laws in Berlin

Berlin is facing large increases in rent levels over the last decades. To overcome pressure on the market, the Senate of the city has repeatedly introduced rent controls. While the German Constitutional Court has found the latest rent-controlling legislation, the Price Ceiling Act of 2020 to be violating German constitutional law and hence invalid and void, there is strong economic evidence for why rent controls do more harm than good and after all even lead to a decrease in housing provided. To provide for affordable housing, the City of Berlin needs to pursue other measures that stipulate the construction of new housing: the increase and acceleration of the granting of building permits, release of shallow land and actively engage in municipal construction.

Personalization from Customer Data Aggregation Using List Price

When consumers’ inferences of their reservation values are subject to environmental noise, firms can use customer data aggregation to obtain superior knowledge. This facilitates personalized pricing but may also induce consumer suspicions of overpaying. To alleviate the suspicions and convince consumers of their value, the firm may design its personalization scheme to include a list price in addition to the personalized prices. We find that only a separating equilibrium with list pricing survives the intuitive criterion. Specifically, when consumers underestimate their value, it is essential to use a binding list price to inform the consumers about the market’s price ceiling. Contrary to the conventional wisdom, the firm cannot abuse its informational advantage to steer consumers into overestimation, and price discrimination may strictly benefit the consumers who avoid overpaying. This paper was accepted by Dmitri Kuksov, marketing.

Should the State Control Tariffs?

Tariffs or price control has been a controversial subject in recent years. The debate between legal experts and economists is still a hot topic in any discussion. Tariff control regulated in the work creation omnibus law seems to be a topic that must be discussed again regarding this regulation’s urgency. Are specific prices so impressive that the government can intervene in regulating them? This article examines the urgency of rules regarding price controls to create a healthy competitive environment. After conducting a critical literature review, it was analyzed with critical analysis and looking at the objective of competition law was to maximize welfare by protecting competition. The results in this article indicated that the government could only intervene in regulating price-fixing only if companies’ pricing could harm the country’s economy and consumer welfare. The government, therefore, had an interest in regulating the price ceiling. Meanwhile, the price floor, which was believed to be pro-consumer and could promote consumer welfare had no interest and should not have been limited by the government.

Carbon-reducing innovation as the essential policy frontier – towards finding the ways that work

Finding the ways that work to deliver the innovation needed should be given parity of esteem with getting the prices right as a focus of the economics profession and policy systems. Learn from experience as regards carbon pricing and carbon-reducing innovation; insights from the latter coming mainly from the US, China and Europe; demographically relatively small countries – Denmark (wind) and Australia (solar PV) – can make outsize contributions. A carbon price ceiling is too low to drive innovation; generating carbon-reducing innovation requires that it be explicitly recognized as a priority, and nurtured accordingly: identify the priority area(s) where innovation at scale will be necessary to make progress; baseline the elements of the innovation ecosystem which are already in place, and the gaps that need to be filled. Key elements include institutions and incentives that promote innovation, a research and enterprise community that make it happen, and a supportive public.