Reference pricing with endogenous generic entry

Kurt Brekke (), Chiara Canta () and Odd Rune Straume

No 4/2015, Discussion Paper Series in Economics from Norwegian School of Economics, Department of Economics

Abstract: In this paper we study the e¤ect of reference pricing on pharmaceutical prices and expenditures 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 di¤erent generic drugs. We …nd that, for a given number of fi…rms, 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.

Keywords: Pharmaceuticals; Reimbursement schemes; Generic entry (search for similar items in EconPapers)
JEL-codes: I11 I18 L13 L51 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2015-03-18
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Citations: View citations in EconPapers (5)

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Journal Article: Reference pricing with endogenous generic entry (2016)
Working Paper: Reference pricing with endogenous generic entry (2015)
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