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Journal of Economic Perspectives: Vol. 16 No. 4 (Fall 2002)

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Pharmaceuticals in U.S. Health Care: Determinants of Quantity and Price

Article Citation

Berndt, Ernst R. 2002. "Pharmaceuticals in U.S. Health Care: Determinants of Quantity and Price ." Journal of Economic Perspectives, 16(4): 45-66.

DOI: 10.1257/089533002320950975

Abstract

The U.S. pharmaceutical industry has again become the focus of considerable controversy. In understanding the economics underlying this industry, distinctions between short, medium and long-run costs are critical, as is that between economic and accounting costs. Consumers' heterogeneous valuations create strong incentives for non-uniform pricing and targeted marketing. The conflict between static efficiency (price new drugs low, near short-run marginal cost) and dynamic efficiency (price new drugs high, maintain incentives for innovation) is deep and enduring. This trade-off is becoming more severe as the relative costs of bringing new drugs to market have increased sharply.

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Berndt, Ernst R.

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