Price regulation in the pharmaceutical industry: Prescription or placebo?

President Clinton and several Legislators have proposed restrictions on price increases in the pharmaceutical industry similar to those on some public utilities. Studies, however, suggest that under conditions of rapidly changing demand (as found in pharmaceuticals), price-caps could be manipulated. Using simulations, we show that in reaction to regulation, pharmaceutical firms would optimally set launch prices 50 percent higher than in an unregulated market. Although initially hurt, after seven years consumers benefit as the unregulated price rises above the price-cap. Thus, before enacting legislation, Congress should assess America's willingness to pay more now for lower prices in the future.