Scandinavian Working Papers in Economics

Working Papers in Economics,
University of Bergen, Department of Economics

No 14/06: Regulation and Pricing of Pharmaceuticals: Reference Pricing or Price Cap Regulation?

Kurt R. Brekke (), Astrid L. Grasdal () and Tor Helge Holmås ()
Additional contact information
Kurt R. Brekke: Norwegian School of Economics and Business Administration, Department of Economics, Postal: Helleveien 30, N-5045 Bergen, Norway
Astrid L. Grasdal: University of Bergen, Department of Economics, Postal: Hermann Fossgt. 6, N-5007 Bergen, Norway
Tor Helge Holmås: Institute for Reasearch in Economics and Business Administration, Health Economic Bergen, Postal: Breiviksveien 40, N-5045 Bergen, Norway

Abstract: We study the relationship between regulatory regimes and pharmaceutical firms’ pricing strategies using a unique policy experiment from Norway, which in 2003 introduced a reference price (RP) system called “index pricing” for a sub-sample of off-patent pharmaceuticals, replacing the existing price cap (PC) regulation. We estimate the effect of the reform using a product level panel dataset, covering the drugs exposed to RP and a large number of drugs still under PC regulation in the time before and after the policy change. Our results show that RP significantly reduced both brand-name and generic prices within the reference group, with the effect being stronger for brand-names. We also identify a negative cross-price effect on therapeutic substitutes not included in the RP-system. In terms of policy implications, the results suggest that RP is more effective than PC regulation in lowering drug prices, while the cross-price effect raises a concern about patent protection.

Keywords: Pharmaceuticals; Price Regulation; Branded-Generic competition.

JEL-codes: I11; L13; L51; L65

30 pages, September 19, 2006

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