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Reference pricing systems on the pharmaceutical market

Maximiliane Unsorg

No 115, University of Tuebingen Working Papers in Economics and Finance from University of Tuebingen, Faculty of Economics and Social Sciences

Abstract: Constantly rising expenditures for pharmaceuticals require government intervention in firms' pricing decisions. To this end, reference pricing systems are a frequently employed regulatory mechanism. This paper considers a duopoly market with vertically differentiated firms under different competition types. Starting from the existing literature it can be confirmed that the introduction of a reference price leads to lower equilibrium prices and induces fiercer competition between firms. Further, it can be shown that reference pricing promotes generic usage and leads to an increased market coverage. Hence, an improved provision of medical supply is achieved due to the lower prices and the stimulated demand for drugs. The paper demonstrates that even under the increased demand consumer and insurance expenditures are reduced. The model isolates the mechanisms of reference pricing and shows the effects on the consumer decisions. Lastly, consumer surplus increases when implementing the regulation.

Keywords: reference pricing; pharmaceutical market; copayment; price cap; price competition; expenditures; consumer surplus (search for similar items in EconPapers)
JEL-codes: I11 I18 L51 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-hea, nep-ias and nep-reg
Date: 2018
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