Pharmaceutical R&D in the Setting of Incomplete European Integration

The article analyzes the consequences of national price regulation for newly developed medicines in the setting of a partially integrated EU-wide market for pharmaceuticals and strategic entry-decisions by pharmaceutical enterprises. EU member states can be seen as jointly contributing to financing R&D conducted by the pharmaceutical industry. The article derives and compares the welfare implications of three regimes to organize this kind of collective action. First, a situation in which each government of a EU member state grants the price for a medicine it thinks appropriate, oriented solely at domestic considerations, but there is no spill over of prices among national markets. Second, the current situation in the EU of introduced tradability for medicines while price setting remained a national competence. Third, the possible situation of a centralized price setting procedure leading to a single price with compensations for those member states unable to pay this European price. The article argues that the process of EU integration in pharmaceuticals has left an optimal state without reaching another optimal one, but is instead stuck in a state of diminished welfare for all parties concerned.