IDEAS home Printed from
MyIDEAS: Login to save this paper or follow this series

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

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

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.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3258.

in new window

Date of creation: 2010
Date of revision:
Handle: RePEc:ces:ceswps:_3258
Contact details of provider: Postal: Poschingerstrasse 5, 81679 Munich
Phone: +49 (89) 9224-0
Fax: +49 (89) 985369
Web page:

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Mats A. Bergman & Niklas Rudholm, 2003. "The Relative Importance of Actual and Potential Competition: Empirical Evidence From the Pharmaceuticals Market," Journal of Industrial Economics, Wiley Blackwell, vol. 51(4), pages 455-467, December.
  2. Kaiser, Ulrich & Méndez, Susan J. & Rønde, Thomas & Ullrich, Hannes, 2013. "Regulation of Pharmaceutical Prices: Evidence from a Reference Price Reform in Denmark," IZA Discussion Papers 7248, Institute for the Study of Labor (IZA).
  3. Konigbauer, Ingrid, 2007. "Advertising and generic market entry," Journal of Health Economics, Elsevier, vol. 26(2), pages 286-305, March.
  4. Kurt R. Brekke & Odd Rune Straume, 2008. "Pharmaceutical Patents: Incentives for R&D or Marketing?," CESifo Working Paper Series 2433, CESifo Group Munich.
  5. Brekke, Kurt R. & Grasdal, Astrid L. & Holms, Tor Helge, 2009. "Regulation and pricing of pharmaceuticals: Reference pricing or price cap regulation?," European Economic Review, Elsevier, vol. 53(2), pages 170-185, February.
  6. 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.
  7. Lopez-Casasnovas, Guillem & Puig-Junoy, Jaume, 2000. "Review of the literature on reference pricing," Health Policy, Elsevier, vol. 54(2), pages 87-123, November.
  8. Atanu Saha & Henry Grabowski & Howard Birnbaum & Paul Greenberg & Oded Bizan, 2006. "Generic Competition in the US Pharmaceutical Industry," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 13(1), pages 15-38.
  9. Sara Ellison Fisher & Iain Cockburn & Zvi Griliches & Jerry Hausman, 1997. "Characteristics of Demand for Pharmaceutical Products: An Examination of Four Cephalosporins," RAND Journal of Economics, The RAND Corporation, vol. 28(3), pages 426-446, Autumn.
  10. Kurt R. Brekke & Odd Rune Straume, 2009. "Pharmaceutical Patents: Incentives for Research and Development or Marketing?," Southern Economic Journal, Southern Economic Association, vol. 76(2), pages 351-374, October.
  11. 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.
  12. Danzon, Patricia M & Chao, Li-Wei, 2000. "Does Regulation Drive out Competition in Pharmaceutical Markets?," Journal of Law and Economics, University of Chicago Press, vol. 43(2), pages 311-57, October.
  13. Judith K. Hellerstein, 1998. "The Importance of the Physician in the Generic Versus Trade-Name Prescription Decision," RAND Journal of Economics, The RAND Corporation, vol. 29(1), pages 108-136, Spring.
  14. Christopher F Baum & Mark E. Schaffer & Steven Stillman, 2007. "Enhanced routines for instrumental variables/GMM estimation and testing," CERT Discussion Papers 0706, Centre for Economic Reform and Transformation, Heriot Watt University.
  15. Bardey, David & Bommier, Antoine & Jullien, Bruno, 2009. "Retail Price Regulation and Innovation: Reference Pricing in the Pharmaceutical Industry," TSE Working Papers 09-026, Toulouse School of Economics (TSE).
  16. Douglas Staiger & James H. Stock, 1994. "Instrumental Variables Regression with Weak Instruments," NBER Technical Working Papers 0151, National Bureau of Economic Research, Inc.
  17. repec:oup:qjecon:v:119:y:2004:i:1:p:249-275 is not listed on IDEAS
  18. Grabowski, Henry G & Vernon, John M, 1992. "Brand Loyalty, Entry, and Price Competition in Pharmaceuticals after the 1984 Drug Act," Journal of Law and Economics, University of Chicago Press, vol. 35(2), pages 331-50, October.
  19. Thomas Aronsson & Mats Bergman & Niklas Rudholm, 2001. "The Impact of Generic Drug Competition on Brand Name Market Shares – Evidence from Micro Data," Review of Industrial Organization, Springer, vol. 19(4), pages 423-433, December.
  20. Sakakibara, Mariko & Branstetter, Lee, 2001. "Do Stronger Patents Induce More Innovation? Evidence from the 1988 Japanese Patent Law Reforms," RAND Journal of Economics, The RAND Corporation, vol. 32(1), pages 77-100, Spring.
  21. Scott Morton, Fiona M., 2000. "Barriers to entry, brand advertising, and generic entry in the US pharmaceutical industry," International Journal of Industrial Organization, Elsevier, vol. 18(7), pages 1085-1104, October.
  22. Miraldo, Marisa, 2009. "Reference pricing and firms' pricing strategies," Journal of Health Economics, Elsevier, vol. 28(1), pages 176-197, January.
  23. Ching, Andrew T., 2010. "Consumer learning and heterogeneity: Dynamics of demand for prescription drugs after patent expiration," International Journal of Industrial Organization, Elsevier, vol. 28(6), pages 619-638, November.
  24. Nina Pavcnik, 2002. "Do Pharmaceutical Prices Respond to Potential Patient Out-of-Pocket Expenses?," RAND Journal of Economics, The RAND Corporation, vol. 33(3), pages 469-487, Autumn.
  25. Andrew Ching, 2004. "A Dynamic Oligopoly Structural Model for the Prescription Drug Market After Patent Expiration," Econometric Society 2004 Far Eastern Meetings 735, Econometric Society.
  26. Nancy T. Gallini, 2002. "The Economics of Patents: Lessons from Recent U.S. Patent Reform," Journal of Economic Perspectives, American Economic Association, vol. 16(2), pages 131-154, Spring.
  27. Margaret K. Kyle, 2007. "Pharmaceutical Price Controls and Entry Strategies," The Review of Economics and Statistics, MIT Press, vol. 89(1), pages 88-99, February.
  28. Scherer, F.M., 2000. "The pharmaceutical industry," Handbook of Health Economics, in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 25, pages 1297-1336 Elsevier.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_3258. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Julio Saavedra)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.