Scandinavian Working Papers in Economics
Working Papers in Economics,
University of Bergen, Department of Economics
No 19/05: Reference Pricing of Pharmaceuticals
Kurt R Brekke (), Ingrid Königbauer () and Odd Rune Straume ()
Additional contact information
Kurt R Brekke: Department of Economics, Norwegian School of Economics and Business Administration, Postal: Helleveien 30, N-5045 Bergen, Norway
Ingrid Königbauer: Department of Economics, University of Munich, Postal: Ludwigstrasse 28 RG/4, D-80799 Munich, 80539, Germany, ,
Odd Rune Straume: Department of Economics, University of Bergen, Postal: Hermann Fossgt. 6, N-5007 Bergen, Norway
Abstract: We consider a therapeutic market with potentially three pharmaceutical firms. Two of the firms offer horizontally differentiated brand-name drugs. One of the brand-name drugs is a new treatment under patent protection that will be introduced, if the profits are sufficient to cover the entry costs. The other brand-name drug has already lost its patent and faces competition from a third firm offering a generic version perceived to be of lower quality. This model allows us to compare generic reference pricing (GRP), therapeutic reference pricing (TRP), and no reference pricing (NRP). We show that competition is strongest under TRP, resulting in the lowest drug prices (and medical expenditures). However, TRP also provides the lowest profits to the patent-holding firm, making entry of the new drug treatment least likely. Surprisingly, we find that GRP distorts drug choices most, exposing patients to higher health risks.
Keywords: Pharmaceuticals; Reference Pricing; Product differentiation
35 pages, November 29, 2005
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