Reference pricing and firms' pricing strategies
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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- Kurt R. Brekke & Ingrid Königbauer & Odd Rune Straume, 2006.
"Reference Pricing of Pharmaceuticals,"
CESifo Working Paper Series
1825, CESifo Group Munich.
- 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.
- Jorge Mestre, 2003. "Reference prices: The Spanish way," Investigaciones Economicas, Fundación SEPI, vol. 27(1), pages 125-149, January.
- 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.
- Ching-to Albert Ma, 1994.
"Health Care Payment Systems: Cost and Quality Incentives,"
0047, Boston University - Industry Studies Programme.
- 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.
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