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Reference pricing with endogenous generic entry

Author

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  • Kurt R. Brekke

    () (Department of Economics, Norwegian School of Economics)

  • Chiara Canta

    () (Department of Economics, Norwegian School of Economics)

  • Odd Rune Straume

    () (Universidade do Minho - NIPE)

Abstract

In this paper we study the effect of reference pricing on pharmaceutical prices and ex-penditures when generic entry is endogenously determined. We develop a Salop-type model where a brand-name producer competes with generic producers in terms of prices. In the market there are two types of consumers: (i) brand biased consumers who choose between brand-name and generic drugs, and (ii) brand neutral consumers who choose between the different generic drugs. We find that, for a given number of firms, reference pricing leads to lower prices of all products and higher brand-name market shares compared with a reimbursement scheme based on simple coinsurance. Thus, in a free entry equilibrium, the number of generics is lower under reference pricing than under coinsurance, implying that the net effects of reference pricing on prices and expenditures are ambiguous. Allowing for price cap regulation, we show that the negative effect on generic entry can be reversed, and that reference pricing is more likely to result in cost savings than under free pricing. Our results shed light on the mixed empirical evidence on the effects of reference pricing on generic entry.

Suggested Citation

  • Kurt R. Brekke & Chiara Canta & Odd Rune Straume, 2015. "Reference pricing with endogenous generic entry," NIPE Working Papers 2/2015, NIPE - Universidade do Minho.
  • Handle: RePEc:nip:nipewp:2/2015
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    References listed on IDEAS

    as
    1. Patricia M. Danzon & Jonathan D. Ketcham, 2004. "Reference Pricing of Pharmaceuticals for Medicare: Evidence from Germany, the Netherlands, and New Zealand," NBER Chapters,in: Frontiers in Health Policy Research, Volume 7, pages 1-54 National Bureau of Economic Research, Inc.
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    3. Kaiser, Ulrich & Mendez, Susan J. & Rønde, Thomas & Ullrich, Hannes, 2014. "Regulation of pharmaceutical prices: Evidence from a reference price reform in Denmark," Journal of Health Economics, Elsevier, vol. 36(C), pages 174-187.
    4. Richard G. Frank & David S. Salkever, 1997. "Generic Entry and the Pricing of Pharmaceuticals," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(1), pages 75-90, March.
    5. Brekke, Kurt R. & Konigbauer, Ingrid & Straume, Odd Rune, 2007. "Reference pricing of pharmaceuticals," Journal of Health Economics, Elsevier, vol. 26(3), pages 613-642, May.
    6. Miraldo, Marisa, 2009. "Reference pricing and firms' pricing strategies," Journal of Health Economics, Elsevier, vol. 28(1), pages 176-197, January.
    7. Brekke, Kurt R. & Canta, Chiara & Straume, Odd Rune, 2015. "Does Reference Pricing Drive Out Generic Competition in Pharmaceutical Markets? Evidence from a Policy Reform," Discussion Paper Series in Economics 11/2015, Norwegian School of Economics, Department of Economics.
    8. 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.
    9. repec:nip:nipewp:06/2015 is not listed on IDEAS
    10. Brekke, Kurt R. & Holmas, Tor Helge & Straume, Odd Rune, 2011. "Reference pricing, competition, and pharmaceutical expenditures: Theory and evidence from a natural experiment," Journal of Public Economics, Elsevier, vol. 95(7), pages 624-638.
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    1. repec:kap:ijhcfe:v:17:y:2017:i:4:d:10.1007_s10754-017-9216-x is not listed on IDEAS
    2. Brekke, Kurt R. & Canta, Chiara & Straume, Odd Rune, 2015. "Does Reference Pricing Drive Out Generic Competition in Pharmaceutical Markets? Evidence from a Policy Reform," Discussion Paper Series in Economics 11/2015, Norwegian School of Economics, Department of Economics.
    3. Alice M. Ellyson & Anirban Basu, 2018. "The New Prescription Drug Paradox: Pipeline Pressure and Rising Prices," NBER Working Papers 24387, National Bureau of Economic Research, Inc.
    4. Brekke, Kurt R. & Canta, Chiara & Straume, Odd Rune, 2016. "Reference pricing with endogenous generic entry," Journal of Health Economics, Elsevier, vol. 50(C), pages 312-329.

    More about this item

    Keywords

    Pharmaceuticals; Reimbursement schemes; Generic entry;

    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
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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