Competition and the Reference Pricing Scheme for pharmaceuticals

Simone Ghislandi

Journal of Health Economics, 2011, vol. 30, issue 6, 1137-1149

Abstract: By introducing n (>1) firms with infinite cross-price elasticity (i.e. generic drugs), we explore the effects of competition on the optimal pricing strategies under a Reference Pricing Scheme (RPS). A two-stage model repeated infinite number of times is presented. When stage 1 is competitive, the equilibrium in pure strategies exists and is efficient only if the reference price (R) does not depend on the price of the branded product. When generics collude, the way R is designed is crucial for both the stability of the cartel among generics and the collusive prices in equilibrium. An optimally designed RPS must set R as a function only of the infinitely elastic side of the market and should provide the right incentives for competition.

Keywords: Rerence pricing; Pharmaceuticals; Generic drugs; Competition (search for similar items in EconPapers)
JEL-codes: I18 L10 L41 L51 (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jhecon:v:30:y:2011:i:6:p:1137-1149

DOI: 10.1016/j.jhealeco.2011.08.010

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