PRICE REGULATION IN THE PHARMACEUTICAL-INDUSTRY - PRESCRIPTION OR PLACEBO

President Clinton and several Legislators have proposed restrictions o n price increases in the pharmaceutical industry similar to those on s ome public utilities. Studies, however, suggest that under conditions of rapidly changing demand (as found in pharmaceuticals), price-caps c ould be manipulated. Using simulations, we show that in reaction to re gulation, pharmaceutical firms would optimally set launch prices 50 pe rcent higher than in an unregulated market. Although initially hurt, a fter seven years consumers benefit as the unregulated price rises abov e the price-cap. Thus, before enacting legislation, Congress should as sess America's willingness to pay more now for lower prices in the fut ure.