Pharmaceutical Supply Chain in China: Pricing and Production Decisions with Price-Sensitive and Uncertain Demand

Abstract

In this paper, we apply game theory to study the price competition between drugstores and hospitals in China’s pharmaceutical supply chain. Motivated by drug shortages and price disparity problems, we build a simplified model with one supplier, one hospital, and one drugstore in which the sellers sell one kind of drug and compete on price. The hospital receives a discount from the government when ordering the drug and both sellers face a price-sensitive and uncertain demand. The existence and uniqueness of a Nash equilibrium are proved and closed-form solutions are found for linear demand cases. We characterize the pricing and ordering decisions of the hospital and drugstore. The analysis shows that high ex-factory price, high price sensitivity, and a small discount are three factors contributing to drug shortages. We consider two special kinds of linear demand to obtain insights into the drug price disparity problem.