Economics of Excessive Pricing: An Application to the Pharmaceutical Industry

Journal of European Competition Law & Practice, February 22, 2019

A recent resurgence of excessive or unfair pharmaceutical pricing cases brought by European competition authorities has underscored the question of how European regulatory authorities and courts ought to curb prices deemed to be “too high.” What tests ought to be used to determine whether prices are excessive or unfair, and should the policing of such prices be accomplished by the enforcement of competition law or by improving existing regulatory frameworks?

A new Economist’s Note in the Journal of European Competition Law & Practice by two Analysis Group consultants examines these issues in detail. In “Economics of Excessive Pricing: An Application to the Pharmaceutical Industry,” Managing Principal Antoine Chapsal and Vice President Joshua White lay out the prevailing three-step test by which prices are determined to be excessive: assessment of dominant position in an appropriately defined market, establishment of robust benchmark comparisons, and assessment of economic profitability. For each step, they summarize the reasons why particular features of the pharmaceutical market may complicate or even frustrate the relevant inquiry.

Given the potential for serious harm to the market and to society if intervention is flawed, the authors ask whether the enforcement of competition policy is the optimal vehicle for controlling excessive prices. “To the extent that governments or public health authorities believed that companies in recent excessive pricing cases were taking advantage of gaps in regulatory policy,” they conclude, “action should have been directed at improving the regulatory policy rather than competition law enforcement.”

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Calcagno C, Chapsal A, White J