VIRGIN MOBILE Pricing Decision by mikeholy

VIEWS: 95 PAGES: 35

									AEM 4160: STRATEGIC PRICING
PROF.: JURA LIAUKONYTE




LECTURE 10
PRICING GARDASIL
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


    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


   Is Gardasil a Good Product?
Pricing in the Biomedical Industry
   What factors should Merck consider when setting
    the price?
Factors:
   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
   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
   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
   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
   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
Step 2a
   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
   CIN 1: __________________________________
   CIN 2/3: ________________________________
   Cervical cancer: ___________________________

   Gardasil will prevent (estimates):
       CIN 1: 50%
       CIN 2: 70%
       Cervical Cancer: 70%
Calculate total savings:
   CIN 1: ____________________
   CIN 2/3: ____________________
   Cervical cancer: _________________
     TOTAL   SAVINGS: ______________________
Savings now or later?
   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
   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?
   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
Calculating cost per QALY
   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
   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
   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
   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
Step 2a
   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
   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:
   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?
   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
   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?
   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
ADVERTISING AND PRICING
Stylized Facts About Advertising
   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

   Assume a firm faces a downward-sloping demand
    inverse 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
   The elasticity of output demand with respect
     to advertising A is defined as
                   Q / Q   A Q
              EA         
                   A / A   Q A
• We can derive the following relationship:
       A      EA
                   = Advertising/sales ratio
     P * Q | Ed |
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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