Effects of price cap regulation on the pharmaceutical supply chain

Abstract This paper considers a pharmaceutical supply chain composed of one pharmaceutical manufacturer and one pharmacy. We investigate how price cap regulation affects pharmaceutical firms' pricing decisions. We also evaluate the economic and social performance of the pharmaceutical supply chain and assess the risks associated with price cap regulation. The derived equilibriums under different price cap regulations, including retailer price cap regulation, manufacturer price cap regulation and linkage price cap regulation, are compared to that without regulation. Our results show that one-sided price cap regulation will damage the economic performance of the regulated firm, whereas the unregulated firm may gain a financial advantage. The regulation may increase the risk of a supply shortage if pharmaceutical firms cannot cope with the financial loss. In contrast, linkage price cap regulation can be an effective policy for improving both the economic and social performance of the pharmaceutical supply chain.