The effects of rebate regulation on cost behavior inthe korean pharmaceutical industry: Focusing on cost stickiness

This study analyzes the effect of the pharmaceutical rebate regulation on the cost of goods sold by pharmaceutical companies. This policy, which was adopted in November 2010, bans the payment or reception of rebate. Such prohibition affects the cost of goods sold or being sold, as well as the general administrative expenses for a pharmaceutical company, which may affect the cost stickiness of the goods sold. Results are detailed below. First, cost stickiness in the cost of goods sold similar to the manufacturing industry was observed. This result indicates minimal cost-saving behavior taken such as decreasing marketing expenses or laying off employees even when sales drop. Second, pharmaceutical rebate regulation appeared to ease cost stickiness for pharmaceutical companies. This result means that when sales decrease, companies reduced their marketing or labor expenses, which reduced the rebate of pharmaceutical companies. Therefore, rebate regulation is deemed effective in regulating the rebate payments of pharmaceutical firms. This study offers policy implications on the implementation of pharmaceutical rebate regulation by government authorities.