Optimal pricing strategies and social welfare of a diabetic pharmaceutical supply chain under supply disruption risk

Abstract

Diabetes is a serious public health threat. Therefore, the need for the supply and dispensing of diabetic drugs cannot be neglected. This study explores the impacts of supply disruption risks on pricing strategies for two diabetic drugs under three power structures, i.e., supplier–Stackelberg (SS), drugstore–Stackelberg (DRS), and centralized setting (CS), in an attempt to track the optimum strategies. We show how changes in procurement costs and disruption likelihood alter the balance between consumer surplus, profit, and overall social welfare within the pharmaceutical supply chain. CS will be preferred in scenarios in which centralized control over procurement and distribution is highly valuable, particularly in the presence of high procurement costs and supply disruptions, such as those that occur with specialized medications such as insulin analogs and biologics. In addition, in scenarios of low to moderate procurement costs, especially for generic drugs, the DRS strategy dominates CS in the advocacy of social welfare since drugstores can buy at competitive prices. Overall, DRS and CS consistently outperform SS in terms of consumer surplus. However, SS becomes more effective in scenarios where supply disruptions occur and procurement costs drop to zero, such as when governments subsidize drugs during emergencies.

Graphical abstract

Keywords

pharmaceutical supply chain / diabetic drug shortage / disruption risk / patient surplus / social welfare

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The Author(s). This article is published with open access at link.springer.com and journal.hep.com.cn