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Retail Price Regulation and Innovation: Reference Pricing in the Pharmaceutical Industry

  • Bardey, David
  • Bommier, Antoine
  • Jullien, Bruno

Our paper is a first attempt to evaluate the long run impact of reference pricing on pharmaceutical innovation, health and expenditures. The model is based on a dynamic game involving three types of agents: pharmaceutical firms, consumers and a regulatory entity. Pharmaceutical firms choose the level of research investment and its innovative content, then negotiate introductory prices for new drugs with the regulator. Reference pricing affects negatively the intensity of research and it also modifies the types of innovations that are brought to the market, deterring small innovations. The model is calibrated with a small data on statins in France. Our results suggest that reference pricing typically generates a decline in health, whereas discounted expenditures may decrease or increase, depending on the degree of deterrence of cost reducing innovations.

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Paper provided by Toulouse School of Economics (TSE) in its series TSE Working Papers with number 09-026.

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Date of creation: Jul 2009
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Publication status: Published in Journal of Health Economics, vol.�29, n°2, mars 2010, p.�303-316.
Handle: RePEc:tse:wpaper:21920
Contact details of provider: Phone: (+33) 5 61 12 86 23
Web page: http://www.tse-fr.eu/

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  1. Brekke, Kurt R. & Kuhn, Michael, 2003. "Direct-to-Consumer Advertising in Pharmaceutical Markets," Working Papers in Economics 05/03, University of Bergen, Department of Economics.
  2. DiMasi, Joseph A. & Hansen, Ronald W. & Grabowski, Henry G. & Lasagna, Louis, 1991. "Cost of innovation in the pharmaceutical industry," Journal of Health Economics, Elsevier, vol. 10(2), pages 107-142, July.
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  5. Danzon Patricia M. & Ketcham Jonathan D., 2004. "Reference Pricing of Pharmaceuticals for Medicare: Evidence from Germany, the Netherlands, and New Zealand," Forum for Health Economics & Policy, De Gruyter, vol. 7(1), pages 1-56, January.
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  16. Aghion, Philippe & Tirole, Jean, 1994. "Opening the black box of innovation," European Economic Review, Elsevier, vol. 38(3-4), pages 701-710, April.
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