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Regulation of Pharmaceutical Market in Presence of Counterfeiting Goods

Student: Verbetskaia Viktoriia

Supervisor: Mark I. Levin

Faculty: Faculty of Economic Sciences

Educational Programme: Joint HSE-NES Undergraduate Program in Economics (Bachelor)

Year of Graduation: 2019

The paper proposes a theoretical model of competition in pharmaceutical industry with vertically differentiated goods. A foreign firm produces an authentic drug and competes with a domestic firm that produces a lower quality generic drug. There are also many competitive producers that sell falsified drugs that consumers cannot differentiate from the original one. Three anti-counterfeiting policies are analyzed: (1) stricter government enforcement that raises the probability of fake drug detection; (2) mandatory drug labeling and (3) regulation via the choice of the rate of privatization/nationalization of the domestic firm. It was shown that both stricter enforcement and mandatory labeling reduce the share of falsified original drugs but the sales of falsified drug might increase. This happens if the probability of fake drug detection is low. Lower degree of privatization reduces both the share of falsified original drugs and the total sales of authentic drugs and results in an increase in consumers’ and domestic total surplus. However, this policy is unable to generate a socially efficient resource allocation. The impact of stricter enforcement and mandatory labeling on total surplus is ambiguous but in case of full nationalization of domestic firm stricter enforcement always increases social welfare while labeling improves social welfare only in case when costs of production of falsified drugs are relatively low while labeling imitation is quite expensive.

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