Reference Pricing of Pharmaceuticals

Kurt Brekke (), Ingrid Königbauer and Odd Rune Straume

No 1825, CESifo Working Paper Series from CESifo

Abstract: We consider a therapeutic market with potentially three pharmaceutical firms. Two of the firms offer horizontally differentiated brand-name drugs. One of the brand-name drugs is a new treatment under patent protection that will be introduced if the profits are sufficient to cover the entry costs. The other brand-name drug has already lost its patent and faces competition from a third firm offering a generic version perceived to be of lower quality. This model allows us to compare generic reference pricing (GRP), therapeutic reference pricing (TRP), and no reference pricing (NRP). We show that competition is strongest under TRP, resulting in the lowest drug prices (and medical expenditures). However, TRP also provides the lowest profits to the patent-holding firm, making entry of the new drug treatment least likely. Surprisingly, we find that GRP distorts drug choices most, exposing patients to higher health risks.

Keywords: pharmaceuticals; reference pricing; product differentiation (search for similar items in EconPapers)
JEL-codes: I11 L13 L51 L65 (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-com, nep-cse, nep-hea, nep-ind, nep-mic and nep-mkt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Journal Article: Reference pricing of pharmaceuticals (2007)
Working Paper: Reference Pricing of Pharmaceuticals (2005)
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