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Competition and the Reference Pricing Scheme for pharmaceuticals

  • Ghislandi, Simone
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    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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    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
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505560

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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.
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    15. Zweifel, Peter & Crivelli, Luca, 1996. "Price Regulation of Drugs: Lessons from Germany," Journal of Regulatory Economics, Springer, vol. 10(3), pages 257-73, November.
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