Scandinavian Working Papers in Economics
Discussion Paper Series in Economics,
Norwegian School of Economics, Department of Economics
No 4/2015: Reference pricing with endogenous generic entry.
Kurt R. Brekke (), Chiara Canta () and Odd Rune Straume ()
Additional contact information
Kurt R. Brekke: Dept. of Economics, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Economics, Helleveien 30, N-5045 Bergen, Norway
Chiara Canta: Dept. of Economics, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Economics, Helleveien 30, N-5045 Bergen, Norway
Odd Rune Straume: University of Minho, Postal: University of Minho, Campus de Gualtar, 4710-057 Braga, Portugal
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.
Keywords: Pharmaceuticals; Reimbursement schemes; Generic entry
33 pages, March 18, 2015
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