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Does Reference Pricing Drive Out Generic Competition in Pharmaceutical Markets? Evidence from a Policy Reform

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 impact of reference pricing (RP) on entry of generic firms in the pharmaceutical market. For given prices, RP increases generic firms expected profit, but since RP also stimulates price competition, the impact on generic entry is theoretically ambiguous. In order to empirically test the effects of RP, we exploit a policy reform in Norway in 2005 that exposed a subset of drugs to RP. Having detailed product-level data for a wide set of substances from 2003 to 2013, we find that RP increased the number of generic drugs. We also find that RP increased market shares of generic drugs, reduced the prices of both branded and generic drugs, and led to a (weakly significant) decrease in total drug expenditures. The reduction in total expenditures was relatively smaller than the reduction in average prices, reflecting the fact that lower prices stimulated total demand.

Suggested Citation

  • Brekke, Kurt R. & Canta, Chiara & Straume, Odd Rune, 2015. "Does Reference Pricing Drive Out Generic Competition in Pharmaceutical Markets? Evidence from a Policy Reform," Discussion Paper Series in Economics 11/2015, Norwegian School of Economics, Department of Economics.
    • Handle: RePEc:hhs:nhheco:2015_011
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    References listed on IDEAS

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    Cited by:

    1. Birg, Laura, 2019. "Reference pricing and parallel imports: Evidence from Germany," University of Göttingen Working Papers in Economics 362, University of Goettingen, Department of Economics.
    2. 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.
    3. 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.
    4. 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.

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    More about this item

    Keywords

    Pharmaceuticals; Reference pricing; 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
    • L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology; Plastics

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