Scandinavian Working Papers in Economics

Discussion Paper Series in Economics,
Norwegian School of Economics, Department of Economics

No 11/2015: Does Reference Pricing Drive Out Generic Competition in Pharmaceutical Markets? Evidence from a Policy Reform.

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: Department of Economics/NIPE, University of Minho, Campus de Gualtar, 4710-057 Braga, Portugal

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.

Keywords: Pharmaceuticals; Reference pricing; Generic entry.

JEL-codes: I11; I18; L13; L65

38 pages, June 4, 2015

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