Effects of the Price Parity Clauses on Pharmaceutical Procurement Platforms

Since 2017, Chinese provincial pharmaceutical procurement platforms have successively implemented price parity clauses, which link drug suppliers' local quotations to the lowest prices in other provinces. We develop a theoretical model to examine the interactions among non-for-profit procurement platforms and drug suppliers, and empirically test the findings using city-level public hospital procurement data from 2013 to 2021. The results show that price parity clauses could significantly reduce prices in the early stage, especially for monopolistic drugs. However, as more provincial platforms adopted the policy, suppliers would strategically raise prices to avoid low-price spillovers, thereby reversing the initial price-reducing effect. Moreover, in monopolistic markets, the policy would raise the risks of supply disruption in those regions with low willingness-to-pay. These findings suggest that price parity clauses could create incentive distortions, underscoring the need for careful regulatory design.