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Reference pricing and firms' pricing strategies

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  • Miraldo, Marisa

Abstract

Within a horizontal differentiation model and allowing for heterogeneous qualities, we analyze the effects of reference pricing reimbursement on firms' pricing strategies. With this analysis we find inherent incentives for firms' pricing behavior, and consequently we shed some light on the time consistency of such policy. The analysis encompasses different reference price rules: (i) reference price as the minimum of the observed prices in the market, (ii) reference price as a linear combination of firms' prices. Results show that under the "minimum policy" firms are not able to coordinate on higher prices while the "linear policy", implicitly, provides a coordination device. We have also found that, relatively to the "linear policy", when the reference price is the minimum of observed prices, after policy implementation, total and private expenditures are higher and consumer surplus and firms' profits are lower. With quality differentiation both the minimum and linear policies unambiguously lead to higher prices.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Health Economics.

Volume (Year): 28 (2009)
Issue (Month): 1 (January)
Pages: 176-197

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Handle: RePEc:eee:jhecon:v:28:y:2009:i:1:p:176-197

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Web page: http://www.elsevier.com/locate/inca/505560

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Keywords: Reference pricing Pricing strategies Market coverage Pharmaceutical expenditure;

References

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  1. Marisa Miraldo, 2007. "Reference Pricing Versus Co-Payment in the Pharmaceutical Industry: Price, Quality and Market Coverage," Working Papers 025cherp, Centre for Health Economics, University of York.
  2. Fiona M. Scott Morton, 1999. "Entry Decisions in the Generic Pharmaceutical Industry," RAND Journal of Economics, The RAND Corporation, vol. 30(3), pages 421-440, Autumn.
  3. Brekke, Kurt R & Königbauer, Ingrid & Straume, Odd Rune, 2005. "Reference Pricing of Pharmaceuticals," Working Papers in Economics 19/05, University of Bergen, Department of Economics.
  4. Ma, Ching-to Albert, 1994. "Health Care Payment Systems: Cost and Quality Incentives," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 3(1), pages 93-112, Spring.
  5. Jorge Mestre, 2003. "Reference prices: The Spanish way," Investigaciones Economicas, Fundación SEPI, vol. 27(1), pages 125-149, January.
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Citations

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Cited by:
  1. Begoña Garcia Mariñoso & Izabela Jelovac & Pau Olivella, 2011. "External referencing and pharmaceutical price negotiation," Post-Print halshs-00303682, HAL.
  2. Kurt R. Brekke & Tor Helge Holmås & Odd Rune Straume, 2010. "Reference Pricing, Competition, and Pharmaceutical Expenditures: Theory and Evidence from a Natural Experiment," CESifo Working Paper Series 3258, CESifo Group Munich.
  3. Granlund, David & Köksal, Miyase Yesim, 2011. "Parallel Imports and Mandatory Substitution Reform - A Kick or A Muff for Price Competition in Pharmaceuticals?," HUI Working Papers 49, HUI Research.
  4. Matteo Galizzi & Simone Ghislandi & Marisa Miraldo, 2011. "Effects of Reference Pricing in Pharmaceutical Markets," PharmacoEconomics, Springer, vol. 29(1), pages 17-33, January.
  5. Paolo Buonanno & Matteo M. Galizzi, 2010. "Advocatus, et non latro? Testing the Supplier-Induced-Demand Hypothesis for Italian Courts of Justice," Working Papers 2010.52, Fondazione Eni Enrico Mattei.
  6. Herr, Annika & Suppliet, Moritz, 2012. "Pharmaceutical prices under regulation: Tiered co-payments and reference pricing in Germany," DICE Discussion Papers 48, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
  7. Graf, Julia, 2012. "The effects of rebate contracts on the health care system," DICE Discussion Papers 45, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
  8. Kaiser, Ulrich & Méndez, Susan & Rønde, Thomas & Ullrich, Hannes, 2013. "Regulation of Pharmaceutical Prices: Evidence from a Reference Price Reform in Denmark," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79937, Verein für Socialpolitik / German Economic Association.
  9. Ghislandi, Simone, 2011. "Competition and the Reference Pricing Scheme for pharmaceuticals," Journal of Health Economics, Elsevier, vol. 30(6), pages 1137-1149.
  10. Herr, A.; & Suppliet, M.;, 2011. "Co-Payment Exemptions and Reference Prices: an Empirical Study of Pharmaceutical Prices in Germany," Health, Econometrics and Data Group (HEDG) Working Papers 11/18, HEDG, c/o Department of Economics, University of York.
  11. Yesim Köksal, Miyase, 2009. "REFERENCE PRICING - Making Parallel Trade in Pharmaceuticals Work," Working Papers in Economics 367, University of Gothenburg, Department of Economics, revised 05 Jan 2011.
  12. Granlund, David & Yesim Köksal, Miyase, 2011. "Parallel Imports and Mandatory Substitution Reform: A kick or a muff for price competition in pharmaceuticals," Working Papers in Economics 496, University of Gothenburg, Department of Economics.
  13. Simone Ghislandi & Patrizio Armeni & Claudio Jommi, 2013. "The impact of generic reference pricing in Italy, a decade on," The European Journal of Health Economics, Springer, vol. 14(6), pages 959-969, December.
  14. Julia Graf, 2014. "The effects of rebate contracts on the health care system," The European Journal of Health Economics, Springer, vol. 15(5), pages 477-487, June.

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