Reference Pricing with Endogenous Generic Entry

39 Pages Posted: 17 Apr 2015

See all articles by Kurt Richard Brekke

Kurt Richard Brekke

Norwegian School of Economics (NHH) - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Chiara Canta

Norwegian School of Economics (NHH) - Department of Economics

Odd Rune Straume

University of Minho - Economic Policies Research Unit (NIPE); CESifo (Center for Economic Studies and Ifo Institute)

Date Written: March 18, 2015

Abstract

In this paper we study the effect 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 different generic drugs. We find that, for a given number of firms, 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

JEL Classification: I11; I18; L13; L51

Suggested Citation

Brekke, Kurt Richard and Canta, Chiara and Straume, Odd Rune, Reference Pricing with Endogenous Generic Entry (March 18, 2015). NHH Dept. of Economics Discussion Paper No. 4/2015, Available at SSRN: https://ssrn.com/abstract=2594760 or http://dx.doi.org/10.2139/ssrn.2594760

Kurt Richard Brekke (Contact Author)

Norwegian School of Economics (NHH) - Department of Economics ( email )

Helleveien 30
N-5035 Bergen
Norway

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Chiara Canta

Norwegian School of Economics (NHH) - Department of Economics ( email )

Helleveien 30
N-5035 Bergen
Norway

Odd Rune Straume

University of Minho - Economic Policies Research Unit (NIPE) ( email )

Campus de Gualtar
Braga, 4710-057
Portugal

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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