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AEM 4160: Strategic Pricing Prof.: Jura Liaukonyte Lecture 10 Pricing GardasilPowerPoint Presentation

AEM 4160: Strategic Pricing Prof.: Jura Liaukonyte Lecture 10 Pricing Gardasil

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### AEM 4160: Strategic PricingProf.: Jura LiaukonyteLecture 10 Pricing Gardasil

### Advertising And PRICING Review of Market Estimates Throughout the World.”

QALY

- The quality-adjusted life year (QALY) is a measure of disease burden, including both the quality and the quantity of life lived.
- It is used in assessing the value for money of a medical treatment.
- The QALY is based on the number of years of life that would be added by the treatment.
- Each year in perfect health is assigned the value of 1.0 down to a value of 0.0 for death.

QALY

- Used in cost-utility analysis to calculate the ratio of cost to QALYs saved for a particular health care treatment.
- Helpful in allocating healthcare resources,
- Treatment with a lower cost to QALY saved ratio being preferred over an intervention with a higher ratio.
- Controversial: some people will not receive treatment because it is too costly
- Cost per QALY under $50,000 is acceptable

Value of Statistical Life

- An economic value assigned to life in general,
- Marginal cost of death prevention in a certain class of circumstances.
- As such, it is a statistical term, the cost of reducing the (average) number of deaths by one.

Value of a Statistical Life and Compensating Differences

- Qa , Qb =probability of fatal injury on job a, b respectively in a given year.
- Wa, Wb = earnings on job a, b in a given year.
- Assume Qa<Qb so that Wa<Wb.
- Compensating difference=Wb-Wa
- Value of a “statistical” life = (Wb-Wa)/(Qb-Qa)
- Example: If a person is faced with .001 higher risk of death per year and is paid $5000 per year extra for that risk, the value of a statistical life is 5000/.001 - $5,000,000.

Viscusi. “The Value of a Statistical Life: A Critical Review of Market Estimates Throughout the World.” Journal of Risk and Uncertainty, v. 27 issue 1, 2003, p. 5.

Value of Life and Compensating Differences Review of Market Estimates Throughout the World.”

- Biases in estimates of statistical value of life
- Valuation is correct only for “marginal” worker. Estimate is too high for infra-marginal worker, and too low for workers that didn’t accept job with risk.
- ex post versus ex ante rewards for risk (compensating difference vs. law suits, insurance, etc.)
- Failure to control for other risks correlated with fatality risk
- Fatality risk measured with error

Question Review of Market Estimates Throughout the World.”

- Is Gardasil a Good Product?

Pricing in the Biomedical Industry Review of Market Estimates Throughout the World.”

- What factors should Merck consider when setting the price?

Factors: Review of Market Estimates Throughout the World.”

- Important or not important?
- Product cost
- R&D Investment?
- Other Vaccines?
- Public Relations?
- Value to the Customer/Benefit?
- Economic Modeling?
- Competition?

Calculating cost per QALY Review of Market Estimates Throughout the World.”

- Cost Per QALY = Cost of a quality life year
- STEP 1: Consider the costs per person:
- Cost per dose: ___________________
- Cost per administration:_____________
- Number of doses: _____________________
- Total cost per patient: __________________

Step 2 Review of Market Estimates Throughout the World.”

- Additional QALYs per person
At age 50, further life expectancy without cervical cancer: ____________

QALY per year: __________________________________________

Total QALYs: ____________________________________________

At age 50, further life expectancy with cervical cancer: ______________

QALY per year: ___________________________________________

Total QALYs: _____________________________________

STEP 2 Review of Market Estimates Throughout the World.”

- Reduction in QALYs with cervical cancer:_________________
- Gardasil prevents:______________________________
- Gardasil incremental QALYs: ________________
- Chance of Getting cervical cancer without Gardasil: _______________
- Incremental QALYs per person: ________________________________
- Cost per QALY:
- Vaccination: _____________________________________
- QALY: ____________________________________
- Cost per QALY:___________________________

Step 2a Review of Market Estimates Throughout the World.”

- This was a rough calculation because it left out an important piece of a puzzle:
- COST SAVINGS
- Fewer Pap tests
- Fewer LLETZ procedures
- Fewer cervical cancers to treat

- COST SAVINGS

Step 2a Review of Market Estimates Throughout the World.”

- Calculate COST savings
- Chance that a woman will have CIN 1: ______________
- Chance that a woman will have CIN 2/3:______________
- Chance that a woman will have cervical cancer: ___________
- Cost to treat CIN 1: ________$55______________
- Cost to treat CIN2/3: _____________________
- Cost to treat cervical cancer: ________________

Saved Costs per person Review of Market Estimates Throughout the World.”

- CIN 1: __________________________________
- CIN 2/3: ________________________________
- Cervical cancer: ___________________________
- Gardasil will prevent (estimates):
- CIN 1: 50%
- CIN 2: 70%
- Cervical Cancer: 70%

Calculate total savings: Review of Market Estimates Throughout the World.”

- CIN 1: ____________________
- CIN 2/3: ____________________
- Cervical cancer: _________________
- TOTAL SAVINGS: ______________________

Savings now or later? Review of Market Estimates Throughout the World.”

- Vaccine given (average or target): __________
- Cancer prevents: _______________
- Difference: ___________________
- Discount the cost savings at say, 8% = $16.50
- In excel the command would be: =PV(0.08, 43, ,-450.2)

Savings later Review of Market Estimates Throughout the World.”

- So the total is”
- Cost per person: _______________
- Savings per person: ___________
- QALY per person: 0.038
- COST per QALY:__________________
- Do the risks of a PR backlash and the need to grow quickly outweigh the benefits of a higher price
- Potential entrant is coming
- Patent is not forever

$360 Too low or too high? Review of Market Estimates Throughout the World.”

- Suppose prices are set so that cost of QALY is $30,000
- What is the maximum price that could be set?
- x = cost per person
- (x-16.50)/0.038 = 30,000
- x =$1156.5
- Or $1156.5/3 = $385 per dose

- ANSWERS TO BLANK SLIDES Review of Market Estimates Throughout the World.”

Calculating cost per QALY Review of Market Estimates Throughout the World.”

- Cost Per QALY = Cost of a quality life year
- STEP 1: Consider the costs per person:
- Cost per dose: ____________$120_______
- Cost per administration:______$20________
- Number of doses: _________3____________
- Total cost per patient: ________$420_______

Step 2 Review of Market Estimates Throughout the World.”

- Additional QALYs per person
At age 50, further life expectancy without cervical cancer: ____31.6 years___

QALY per year: ______________________________0.8______________

Total QALYs: _________________0.8*31.6=25.2____________________

At age 50, further life expectancy with cervical cancer: ______20 years_____

QALY per year: ______________________________0.8______________

Total QALYs: _________________0.8*20=16____________________

STEP 2 Review of Market Estimates Throughout the World.”

- Reduction in QALYs with cervical cancer:___25.2-16=9.2___
- Gardasil prevents:__________________70%____________
- Gardasil incremental QALYs: _______.7*9.2=6.4_________
- Chance of Getting cervical cancer without Gardasil: ___0.6%_
- Incremental QALYs per person: ___________0.006*6.4=0.038_______
- Cost per QALY:
- Vaccination: ___________________$420__________
- QALY: ________________________0.038____________
- Cost per QALY:_________________420/0.038=$11,053__________

Step 2a Review of Market Estimates Throughout the World.”

- This was a rough calculation because it left out an important piece of a puzzle:
- COST SAVINGS
- Fewer Pap tests
- Fewer LLETZ procedures
- Fewer cervical cancers to treat

- COST SAVINGS

Step 2a Review of Market Estimates Throughout the World.”

- Calculate COST savings
- Chance that a woman will have CIN 1: _______10%__
- Chance that a woman will have CIN 2/3:___2.8%___
- Chance that a woman will have cervical cancer: __0.6%_____
- Cost to treat CIN 1: ________$55______________
- Cost to treat CIN2/3: _________$1400____________
- Cost to treat cervical cancer: _______$100,000_________

Saved Costs per person Review of Market Estimates Throughout the World.”

- CIN 1: ________10%*$55=$5.50____________
- CIN 2/3: ______2.8% * $1400=$39.20_______
- Cervical cancer: __0.6%*$100,000=$600_____
- Gardasil will prevent (estimates):
- CIN 1: 50%
- CIN 2: 70%
- Cervical Cancer: 70%

Calculate total savings: Review of Market Estimates Throughout the World.”

- CIN 1: ________5.50*50%=$2.75____________
- CIN 2/3: ______39.20*70%=$27.44__________
- Cervical cancer: __600*70%=$420___________
- TOTAL SAVINGS: _____$450.20______

Savings now or later? Review of Market Estimates Throughout the World.”

- Vaccine given (average or target): ___Age 11____
- Cancer prevents: _____Age 54_____
- Difference: _____________43 years______
- Discount the cost savings at say, 8% = $16.50
- In excel the command would be: =PV(0.08, 43, ,-450.2)

Savings later Review of Market Estimates Throughout the World.”

- So the total is”
- Cost per person: ________$420_______
- Savings per person: ______$16.50_____
- QALY per person: 0.038
- COST per QALY: $10,618.00
- Do the risks of a PR backlash and the need to grow quickly outweigh the benefits of a higher price
- Potential entrant is coming
- Patent is not forever

$360 Too low or too high? Review of Market Estimates Throughout the World.”

- Suppose prices are set so that cost of QALY is $30,000
- What is the maximum price that could be set?
- x = cost per person
- (x-16.50)/0.038 = 30,000
- x =$1156.5
- Or $1156.5/3 = $385 per dose

Stylized Facts About Advertising Review of Market Estimates Throughout the World.”

- Volume of advertising expenditures is large. For the US, advertising consumes over 2% of GDP
- Underneath this national total is a wide variety in firm advertising behavior
- Car makers (e.g., GM) and household product firms (e.g., Proctor & Gamble) spend the most on advertising
- Basic patterns that emerge are:
- Correlation between advertising & market power
- Consistency of advertising behavior within industries—big advertisers remain big over time and across countries

Advertising and Monopoly Power Review of Market Estimates Throughout the World.”

- Assume a firm faces a downward-sloping demandinverse curve but one that shifts depending on the amount of advertising A that the firm does
P=P(Q, A)

- Recall, the Lerner Index, LI

L = (p - MC)/p = 1/|EP|

Where |EP| is the price elasticity of demand

Advertising and Monopoly Power Review of Market Estimates Throughout the World.”

- The elasticity of output demand with respect to advertising A is defined as

- We can derive the following relationship:

= Advertising/sales ratio

Dorfman-Steiner Condition:For a profit-maximizing monopolist, the advertising-to-sales ratio is equal to the ratio of the elasticity of demand with respect to advertising relative to the elasticity of demand with respect to price.

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