Competition matters: Uniform vs. indication-based pricing of pharmaceuticals

Pharmaceutical expenditures are rising rapidly, driven in part by the innovation of highly effective but very expensive drug therapies that treat multiple diseases, implying that payers face a critical trade-off between cost containment and access to new medicines. A key policy question is whether producers should be restricted to uniform pricing or allowed to use indication-based pricing, where prices vary across patient groups. We use a two-market model to analyse how this choice affects drug producers' incentives to invest in new indications, their pricing strategies, and the resulting surplus for health plans. In a monopoly setting, indication-based pricing yields higher profits and thus strengthens incentives to invest in new indications, while the payer prefers uniform pricing unless the fixed investment costs cannot be recouped. However, monopoly-based insights may not hold if the multi-indication producer faces therapeutic competition in one of the markets. Specifically, we identify a softening-of-competition effect, where a uniform pricing restriction serves as a credible commitment to raise prices in the competitive market. In this case, the health plan might favour indication-based pricing to reduce costs. Overall, our findings suggest that neither pricing scheme is universally optimal, underscoring the need for case-by-case assessments across drug classes.