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The vicious circle of pharmaceutical tendering

Pharmaceutical tendering and contracting has long been common in healthcare for medical devices and diagnostics; the Gulf Cooperation Council and the Jamaica Commodity Trading Company have been using pharmaceutical tendering since the 1970s. In the 1990s, international institutions such as the World Health Organisation and the World Bank endorsed tendering as the preferred procurement process for drugs.

Pharmaceutical tendering and contracting is now approximately a quarter of total global turnover, though this is just an estimate as the level of tendering is market- and product-dependent. The impact of tendering on pharmaceutical business, however, is mainly through price erosion.

Open tendering, which means all suppliers are invited to bid, results in the lowest prices, especially when many suppliers are interested in the contract. Other drivers of price erosion include high prices, high volumes, and tendering by ‘winner takes all’ where there are alternatives available.

The ‘winner takes all’ pricing game

We developed a pricing game where the participants are split into competitive teams that are bidding for the business of six hospitals. Each hospital is tendering for full volume in a ‘winner takes all’ market. The hospitals have different volume needs, incumbent player(s) at the start of the game and price sensitivity, and participants know or can imply these characteristics from the hospital descriptions. The game has pre-set award conditions, threshold to switch (if any), growth rates by customer, and ‘attractiveness’ to the customers.

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18th May 2020



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