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Reference Pricing, Competition, and Pharmaceutical Expenditures: Theory and Evidence from a Natural Experiment

Author

Listed:
  • Kurt R. Brekke
  • Tor Helge Holmås
  • Odd Rune Straume

Abstract

We study the impact of regulation on competition between brand-names and generics and pharmaceutical expenditures using a unique policy experiment in Norway, where reference pricing (RP) replaced price cap regulation in 2003 for a sub-sample of off-patent products. First, we construct a vertical differentiation model to analyze the impact of regulation on prices and market shares of brand-names and generics. Then, we exploit a detailed panel data set at product level covering several off-patent molecules before and after the policy reform. Off-patent drugs not subject to RP serve as our control group. We find that RP significantly reduces both brand-name and generic prices, and results in significantly lower brand-name market shares. Finally, we show that RP has a strong negative effect on average molecule prices, suggesting significant cost-savings, and that patients’ copayments decrease despite the extra surcharges under RP.

Suggested Citation

  • 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.
    • Handle: RePEc:ces:ceswps:_3258
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    References listed on IDEAS

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    More about this item

    Keywords

    pharmaceuticals; regulation; generic competition;
    All these keywords.

    JEL classification:

    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology; Plastics

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