Pharmaceutical Price Convergence In The EU: Preliminary Results From The Panel Data Unit Root Test

Abstract

This paper explores the case of market integration and price convergence in the European Union, specifically in the pharmaceutical industry. The EU has been experiencing market integration since 1992, through the removal of trade barriers, the establishment of a single market, and the reduction of exchange rate volatility. In addition, there have been several structural reforms in product markets designed to increase competition, monitor cross-country price differences and increase transparency. One anticipated effect of market integration is price convergence, because of the reduced potential for price discrimination across the EU. This paper is aimed to analyze market integration and price convergence in the European pharmaceutical market, which is the fifth largest industry in the EU. Since 1985, many EU directives have been adopted to achieve a single EU-wide pharmaceutical market, with the aim of enhancing the quality of life for European citizens and the European pharmaceutical industry’s competitiveness and research and development capability. Using annual 1994–2003 IMS Health panel data from five EU countries on prices of drugs used to treat cardiovascular disease and controlling drug and market characteristics; this paper examines how the integration process has affected cross-country drug price dispersion in the EU through the preliminary results from the panel data unit root test. Finally, the results show some evidence of price convergence in the pharmaceutical market, with long term price differences arising from country fixed effects.