Incentives to implement personalized medicine under second-best pricing.

We characterize the socially optimal pricing policy inducing the implementation of personalized medicine. As a benchmark, we analyze the first-best allocation and the second-best optimal policy when only one treatment is available. Then, we characterize the optimal policy that a Health Authority can design to induce the firm to bear an investment and testing cost allowing it to tailor treatment to patients' needs. We show how optimal prices increase with treatment quality and effectiveness. We characterize the conditions under which these prices yield higher social welfare than in the benchmark case. Moreover, we address some policy and industrial organization issues and characterize the pricing policy inducing the firm to choose the optimal level of treatment effectiveness.