In developing countries people do not have adequate access to essential medicines. These countries’ health care systems lack the financial resources for providing appropriate and comprehensive medical support. Moreover, there is a demand for medical innovations which allow fighting neglected diseases. Global health organizations provide assistance during the procurement process of medicines for countries which are subjected to these challenges. In order to ensure that only the right products for the intended purpose at appropriate quality levels reach those in need, these organizations require specific quality standards from their suppliers. With the demand for the implementation of quality assurance measures for pharmaceutical manufactures, the question about the impact of quality standards arises. This thesis provides answers to the question whether and how market participants are affected by these factors.
For this purpose, this work makes use of several papers dealing with the effects of introducing a minimum quality standard (MQS). Since organizations aim at ensuring security of supply at affordable prices, further questions evolve regarding new product development and competition between firms: How can organizations incentivize innovation and market entry of pharmaceutical manufacturers? Which tools do they use and can these tools address possible drawbacks of the introduction of a MQS? An answer to the latter question is given by connecting the results of game-theoretical models with the approaches of existing incentive mechanisms in global health.
The remaining part of this thesis is structured in the following way: Section 2 presents three organizations and their approaches to ensure the product’s compliance with quality standards. In section 3, several game-theoretical models on MQS are analyzed and compared. The analysis highlights the models’ findings, as well as differences between them and the models’ construction. Section 4 considers several incentive mechanisms for suppliers.
Table of Contents
1 Introduction
2 Global Health Organizations and Quality Standards
2.1 UNICEF
2.2 The Global Fund
2.3 World Health Organization
3 Theoretical Models on Minimum Quality Standards
3.1 Competition in a Duopoly
3.2 Competition with more than two Firms
3.3 Market Entry and Innovation
3.4 Limitations of the Models and Implications for Global Health
4 Incentives: Push and Pull Mechanisms
4.1 Advance Market Commitment
4.2 Priority Review Voucher
4.3 Health Impact Fund
4.4 R&D Tax Credits and Research Grants
4.5 Discussion
5 Conclusion
Objectives & Core Topics
This thesis examines the impact of implementing Minimum Quality Standards (MQS) on market participants within the global health sector. It investigates how such standards affect pharmaceutical manufacturers regarding market entry, product innovation, and profitability, while simultaneously addressing the tension between the requirement for high-quality medicines and the need for affordable supply. Finally, it analyzes how incentive mechanisms, categorized into push and pull strategies, can mitigate potential drawbacks of MQS introduction.
- Analysis of quality assurance requirements by organizations like UNICEF and the Global Fund.
- Game-theoretical modeling of MQS effects on price, quantity, and firm competition.
- Investigation of market entry barriers and innovation disincentives caused by stringent quality standards.
- Evaluation of push mechanisms (e.g., R&D tax credits) and pull mechanisms (e.g., Advance Market Commitment, Health Impact Fund).
- Synthesis of strategies to balance quality compliance with sustainable supply and manufacturer incentives.
Excerpt from the book
3.1 Competition in a Duopoly
In the first model constructed by Ronnen (1991), firms compete in prices under a duopolistic market structure. The firms play a simultaneous two-stage game. First, both firms make their decisions on market entry and on expenditure for quality improvement. The second stage is characterized by competition in prices given that both firms enter the market. Ronnen assumes the absence of variable costs with the result that only quality-dependent fixed costs are considered in the decision making. Despite differences in the quality levels of the high and the low quality firm both are subjected to the same development costs (cf. Ronnen (1991) pp. 492–493).
First of all an unregulated market is considered. Ronnen makes use of the backwards induction looking at the best response functions to illustrate how firms behave. By proving the existence of an achievable positive revenue of the low quality firm for all quality levels larger than zero of the high quality firm, Ronnen shows that both firms participate in the market. Ronnen also finds an equilibrium with a unique pair of quality levels (cf. Ronnen (1991) pp. 494–496). In a second step the MQS is introduced into the previously unregulated market. The MQS is set slightly above the quality level of the low quality firm (qLur). Like in the unregulated market Ronnen finds an equilibrium with both firms competing in the market. The equilibrium exists when the low quality firm sets its’ quality according to the MQS (qLmqs = qmin) and the high quality firm plays the best response accordingly. Since the substitutability of the products increases, the high quality firm differentiates by improving its quality (qHmqs). However, the possibility of differentiation is limited due to the increasing development costs for the high quality firm so that an intensification of price competition results. The consumers are consequently being offered products at lower quality-adjusted prices. As a result of the decreasing range of possible qualities, already participating consumers choose higher qualities and new consumers enter the market (cf. Ronnen (1991) pp. 497–498).
Summary of Chapters
1 Introduction: Introduces the challenge of providing essential medicines in developing countries and outlines the research objective of analyzing the effects of minimum quality standards.
2 Global Health Organizations and Quality Standards: Details the procurement processes and quality assurance requirements of UNICEF, the Global Fund, and the World Health Organization.
3 Theoretical Models on Minimum Quality Standards: Presents and compares various game-theoretical models to evaluate how MQS influence competition, market entry, and innovation.
4 Incentives: Push and Pull Mechanisms: Examines diverse financing and reward instruments designed to encourage pharmaceutical research and market participation.
5 Conclusion: Summarizes the findings on the trade-offs of quality standards and discusses how push and pull mechanisms can effectively address these challenges.
Keywords
Minimum Quality Standard, Global Health, Pharmaceutical Procurement, Game Theory, Duopoly, Market Entry, Innovation, Push Mechanisms, Pull Mechanisms, Advance Market Commitment, Health Impact Fund, Priority Review Voucher, R&D Tax Credits, Quality Assurance, Competition
Frequently Asked Questions
What is the core focus of this thesis?
The thesis addresses the dilemma faced by global health organizations: ensuring high quality of essential medicines while maintaining affordability and a sufficient supplier base.
What are the central thematic areas discussed?
The work covers pharmaceutical quality standards, competitive market modeling, and incentive structures to foster innovation in neglected disease drug development.
What is the primary objective or research question?
The goal is to determine how the introduction of Minimum Quality Standards (MQS) impacts market participants and how incentive mechanisms can alleviate the negative effects of these standards.
Which scientific method is utilized?
The thesis primarily uses a literature-based analysis and synthesis of game-theoretical microeconomic models to describe the real-world effects of market regulation.
What topics are covered in the main section?
The main part covers the quality assurance systems of major organizations, theoretical models of firm competition under MQS, and detailed discussions on push and pull incentive mechanisms.
Which keywords characterize this work?
The work is defined by concepts such as MQS, global health, pharmaceutical innovation, market failure, and economic incentive strategies like Advance Market Commitments.
How does the introduction of an MQS specifically affect firm profits?
The analysis indicates that an MQS often leads to increased competition and costs, which can decrease the profits of high-quality firms and potentially drive them to seek more profitable, less regulated markets.
Why are "Push" and "Pull" mechanisms considered essential?
They are necessary to correct market failures, such as time-inconsistency and the lack of research incentives for neglected diseases, by reducing financial risk or rewarding successful product development.
- Quote paper
- Felix Lerch (Author), 2016, Minimum quality standards in global health. Impact and incentives, Munich, GRIN Verlag, https://www.grin.com/document/489026
