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Reference pricing with endogenous generic entry

Author

Listed:
  • Brekke, Kurt R.

    (Dept. of Economics, Norwegian School of Economics and Business Administration)

  • Canta, Chiara

    (Dept. of Economics, Norwegian School of Economics and Business Administration)

  • Straume, Odd Rune

    (University of Minho)

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.

Suggested Citation

  • Brekke, Kurt R. & Canta, Chiara & Straume, Odd Rune, 2015. "Reference pricing with endogenous generic entry," Discussion Paper Series in Economics 4/2015, Norwegian School of Economics, Department of Economics.
    • Handle: RePEc:hhs:nhheco:2015_004
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    References listed on IDEAS

    as
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    Citations

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    Cited by:

    1. Kurt R. Brekke & Chiara Canta & Odd Rune StraumeAuthor-Email: o.r.straume@eeg.uminho.p, 2015. "Does Reference Pricing Drive Out Generic Competition in Pharmaceutical Markets? Evidence from a Policy Reform," NIPE Working Papers 6/2015, NIPE - Universidade do Minho.
    2. Unsorg Maximiliane, 2022. "Reference pricing systems on the pharmaceutical market," German Economic Review, De Gruyter, vol. 23(3), pages 403-421, August.
    3. Kurt R. Brekke & Dag Morten Dalen & Odd Rune Straume, 2024. "Competing with precision: incentives for developing predictive biomarker tests," Scandinavian Journal of Economics, Wiley Blackwell, vol. 126(1), pages 60-97, January.
    4. Brekke, Kurt R. & Canta, Chiara & Straume, Odd Rune, 2016. "Reference pricing with endogenous generic entry," Journal of Health Economics, Elsevier, vol. 50(C), pages 312-329.
    5. Kurt R. Brekke & Dag Morten Dalen & Odd Rune Straume, 2022. "The price of cost-effectiveness thresholds," NIPE Working Papers 5/2022, NIPE - Universidade do Minho.
    6. Brekke, Kurt R. & Dalen, Dag Morten & Straume, Odd Rune, 2022. "Paying for pharmaceuticals: uniform pricing versus two-part tariffs," Journal of Health Economics, Elsevier, vol. 83(C).
    7. Andia, Tatiana & Mantilla, César & Morales, Álvaro & Ortiz, Santiago & Rodríguez-Lesmes, Paul, 2022. "Does price-cap regulation work for increasing access to contraceptives? Aggregate- and pharmacy-level evidence from Colombia," Social Science & Medicine, Elsevier, vol. 311(C).
    8. F. Antoñanzas & C. A. Juárez-Castelló & R. Rodríguez-Ibeas, 2017. "Endogenous versus exogenous generic reference pricing for pharmaceuticals," International Journal of Health Economics and Management, Springer, vol. 17(4), pages 413-432, December.
    9. Eduardo Costa & Carolina Santos, 2022. "Pharmaceutical pricing dynamics in an internal reference pricing system: evidence from changing drugs’ reimbursements," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 23(9), pages 1497-1518, December.
    10. David Granlund, 2022. "The Price Effects of Competition from Parallel Imports and Therapeutic Alternatives: Using Dynamic Models to Estimate the Causal Effect on the Extensive and Intensive Margins," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 60(1), pages 63-92, February.
    11. repec:nip:nipewp:06/2015 is not listed on IDEAS
    12. Katharina Elisabeth Blankart & Tom Stargardt, 2020. "The impact of drug quality ratings from health technology assessments on the adoption of new drugs by physicians in Germany," Health Economics, John Wiley & Sons, Ltd., vol. 29(S1), pages 63-82, October.
    13. Alice M. Ellyson & Anirban Basu, 2018. "The New Prescription Drug Paradox: Pipeline Pressure and Rising Prices," NBER Working Papers 24387, National Bureau of Economic Research, Inc.
    14. Sorek Gilad & Randolph Beard T., 2018. "Public Health Insurance with Monopolistically Competitive Providers and Optional Spot Sales," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 18(1), pages 1-10, January.
    15. Ito, Yuki & Hara, Konan & Kobayashi, Yasuki, 2020. "The effect of inertia on brand-name versus generic drug choices," Journal of Economic Behavior & Organization, Elsevier, vol. 172(C), pages 364-379.

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    More about this item

    Keywords

    Pharmaceuticals; Reimbursement schemes; Generic entry;
    All these keywords.

    JEL classification:

    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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