The impact of the reference price system on the pharmaceutical market: A theoretical approach

Anna Merino

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: This article analyses the impact of the reference price system on the price-setting strategies of the pharmaceutical firms and on the level of generic usage. This model is the first to take explicitly into account the impact of the reference price mechanism on the level of competition between brand-name and generic drugs and national pharmaceutical spending. We consider a duopolistic model with one firm producing the brand-name drug, whose patent has already expired, and the other producing the corresponding generic version. We work in a partial equilibrium framework where firms set prices sequentially and consumers face heterogeneous switching costs.We show that brand producers compensate the decline of profits by selling greater quantities instead of charging higher prices, thus fostering price competition in the pharmaceutical market. This result is a consequence of both the assumption of a vertically differentiated model and the introduction of the reference price system.

Keywords: Brand-name and generic drugs; pricing mechanismand switching costs (search for similar items in EconPapers)
JEL-codes: I18 L11 L15 L51 (search for similar items in EconPapers)
Date: 2000-12, Revised 2003-06
New Economics Papers: this item is included in nep-hea
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:524

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