Coordinating on Lower Prices: Pharmaceutical Pricing Under Political Pressure

Abstract

This paper investigates possible effects of political activity on pharmaceutical prices, focusing on the health care reform period. We characterize firms based on their vulnerability to future price regulation and find that the more vulnerable firms were more likely to take various actions to forestall regulation, most notably coordinating on a specific percentage price increase during 1993. Since moderating price increases could have been an effective tool to avert regulation, the coordination we observe is the obvious response of the industry to a classic collective action problem.