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Competition and the Reference Pricing Scheme for pharmaceuticals

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  • Ghislandi, Simone
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    Abstract

    By introducing n (>1) firms with infinite cross-price elasticity (i.e. generic drugs), we explore the effects of competition on the optimal pricing strategies under a Reference Pricing Scheme (RPS). A two-stage model repeated infinite number of times is presented. When stage 1 is competitive, the equilibrium in pure strategies exists and is efficient only if the reference price (R) does not depend on the price of the branded product. When generics collude, the way R is designed is crucial for both the stability of the cartel among generics and the collusive prices in equilibrium. An optimally designed RPS must set R as a function only of the infinitely elastic side of the market and should provide the right incentives for competition.

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    Bibliographic Info

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

    Volume (Year): 30 (2011)
    Issue (Month): 6 ()
    Pages: 1137-1149

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    Handle: RePEc:eee:jhecon:v:30:y:2011:i:6:p:1137-1149

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

    Related research

    Keywords: Rerence pricing; Pharmaceuticals; Generic drugs; Competition;

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    References

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    1. Matteo Maria. Galizzi & Simone Ghislandi & Marisa Miraldo, 2011. "Effects of Reference Pricing in Pharmaceutical Markets: A Review," PharmacoEconomics, Springer Healthcare | Adis, vol. 29(1), pages 17-33.
    2. Patricia M. Danzon & Jonathan D. Ketcham, 2003. "Reference Pricing of Pharmaceuticals for Medicare: Evidence from Germany, the Netherlands and New Zealand," NBER Working Papers 10007, National Bureau of Economic Research, Inc.
    3. Puig-Junoy, Jaume, 2004. "Incentives and pharmaceutical reimbursement reforms in Spain," Health Policy, Elsevier, vol. 67(2), pages 149-165, February.
    4. d'ASPREMONT, Claude & JACQUEMIN, Alexis & GABSZEWICZ, Jean J. & WEYMARK, John A., . "On the stability of collusive price leadership," CORE Discussion Papers RP -522, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    5. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
    6. Marc Escrihuela-Villar, 2009. "A note on cartel stability and endogenous sequencing with tacit collusion," Journal of Economics, Springer, vol. 96(2), pages 137-147, March.
    7. Anna Merino, 2000. "The impact of the reference price system on the pharmaceutical market: A theoretical approach," Working Papers, Research Center on Health and Economics 524, Department of Economics and Business, Universitat Pompeu Fabra, revised Jun 2003.
    8. B. Douglas Bernheim & Michael D. Whinston, 1990. "Multimarket Contact and Collusive Behavior," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 1-26, Spring.
    9. Lopez-Casasnovas, Guillem & Puig-Junoy, Jaume, 2000. "Review of the literature on reference pricing," Health Policy, Elsevier, vol. 54(2), pages 87-123, November.
    10. Miraldo, Marisa, 2009. "Reference pricing and firms' pricing strategies," Journal of Health Economics, Elsevier, vol. 28(1), pages 176-197, January.
    11. Evans, William N & Kessides, Ioannis N, 1994. "Living by the "Golden Rule": Multimarket Contact in the U.S. Airline Industry," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 341-66, May.
    12. Zweifel, Peter & Crivelli, Luca, 1996. "Price Regulation of Drugs: Lessons from Germany," Journal of Regulatory Economics, Springer, vol. 10(3), pages 257-73, November.
    13. 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.
    14. Anna Merino, 2000. "The impact of the reference price system on the pharmaceutical market: A theoretical approach," Economics Working Papers 524, Department of Economics and Business, Universitat Pompeu Fabra, revised Jun 2003.
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    Cited by:
    1. 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.

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