(Translated by https://www.hiragana.jp/)
Reference pricing with endogenous generic entry
IDEAS home Printed from https://ideas.repec.org/p/hhs/nhheco/2015_004.html
   My bibliography  Save this paper

Reference pricing with endogenous generic entry

Author

Listed:
  • Brekke, Kurt R.

    (Dept. of Economics, Norwegian School of Economics and Business Administration)

  • Canta, Chiara

    (Dept. of Economics, Norwegian School of Economics and Business Administration)

  • Straume, Odd Rune

    (University of Minho)

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.

Suggested Citation

  • Brekke, Kurt R. & Canta, Chiara & Straume, Odd Rune, 2015. "Reference pricing with endogenous generic entry," Discussion Paper Series in Economics 4/2015, Norwegian School of Economics, Department of Economics.
    • Handle: RePEc:hhs:nhheco:2015_004
    as

    Download full text from publisher

    File URL: http://brage.bibsys.no/xmlui/bitstream/handle/11250/280973/1/DP%2004.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Bardey, David & Jullien, Bruno & Lozachmeur, Jean-Marie, 2016. "Health insurance and diversity of treatment," Journal of Health Economics, Elsevier, vol. 47(C), pages 50-63.
    2. Kaiser, Ulrich & Mendez, Susan J. & Rønde, Thomas & Ullrich, Hannes, 2014. "Regulation of pharmaceutical prices: Evidence from a reference price reform in Denmark," Journal of Health Economics, Elsevier, vol. 36(C), pages 174-187.
    3. Danzon Patricia M. & Ketcham Jonathan D., 2004. "Reference Pricing of Pharmaceuticals for Medicare: Evidence from Germany, the Netherlands, and New Zealand," Forum for Health Economics & Policy, De Gruyter, vol. 7(1), pages 1-56, January.
    4. Brekke, Kurt R. & Canta, Chiara & Straume, Odd Rune, 2015. "Does Reference Pricing Drive Out Generic Competition in Pharmaceutical Markets? Evidence from a Policy Reform," Discussion Paper Series in Economics 11/2015, Norwegian School of Economics, Department of Economics.
    5. Brekke, Kurt R. & Grasdal, Astrid L. & Holms, Tor Helge, 2009. "Regulation and pricing of pharmaceuticals: Reference pricing or price cap regulation?," European Economic Review, Elsevier, vol. 53(2), pages 170-185, February.
    6. repec:nip:nipewp:06/2015 is not listed on IDEAS
    7. Brekke, Kurt R. & Holmas, Tor Helge & Straume, Odd Rune, 2011. "Reference pricing, competition, and pharmaceutical expenditures: Theory and evidence from a natural experiment," Journal of Public Economics, Elsevier, vol. 95(7), pages 624-638.
    8. Nina Pavcnik, 2002. "Do Pharmaceutical Prices Respond to Potential Patient Out-of-Pocket Expenses?," RAND Journal of Economics, The RAND Corporation, vol. 33(3), pages 469-487, Autumn.
    9. Brekke, Kurt Richard & Holmås, Tor Helge & Straume, Odd Rune, 2013. "Margins and market shares: Pharmacy incentives for generic substitution," European Economic Review, Elsevier, vol. 61(C), pages 116-131.
    10. Giuseppe Carone & Christoph Schwierz & Ana Xavier, 2012. "Cost-containment policies in public pharmaceutical spending in the EU," European Economy - Economic Papers 2008 - 2015 461, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    11. Brekke, Kurt R. & Canta, Chiara & Straume, Odd Rune, 2016. "Reference pricing with endogenous generic entry," Journal of Health Economics, Elsevier, vol. 50(C), pages 312-329.
    12. Brekke, Kurt R. & Konigbauer, Ingrid & Straume, Odd Rune, 2007. "Reference pricing of pharmaceuticals," Journal of Health Economics, Elsevier, vol. 26(3), pages 613-642, May.
    13. Ying Kong & James R. Seldon, 2004. "Pseudo-Generic Products and Barriers to Entry in Pharmaceutical Markets," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 25(1), pages 71-86, August.
    14. Richard G. Frank & David S. Salkever, 1997. "Generic Entry and the Pricing of Pharmaceuticals," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(1), pages 75-90, March.
    15. Steven N. Wiggins & Robert Maness, 2004. "Price Competition in Pharmaceuticals: The Case of Anti-infectives," Economic Inquiry, Western Economic Association International, vol. 42(2), pages 247-263, April.
    16. Mats A. Bergman & Niklas Rudholm, 2003. "The Relative Importance of Actual and Potential Competition: Empirical Evidence From the Pharmaceuticals Market," Journal of Industrial Economics, Wiley Blackwell, vol. 51(4), pages 455-467, December.
    17. Thomas Aronsson & Mats Bergman & Niklas Rudholm, 2001. "The Impact of Generic Drug Competition on Brand Name Market Shares – Evidence from Micro Data," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 19(4), pages 423-433, December.
    18. Nikas Rudholm, 2001. "Entry and the Number of Firms in the Swedish Pharmaceuticals Market," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 19(3), pages 351-364, November.
    19. Ghislandi, Simone, 2011. "Competition and the Reference Pricing Scheme for pharmaceuticals," Journal of Health Economics, Elsevier, vol. 30(6), pages 1137-1149.
    20. Bardey, D. & Bommier, A. & Jullien, B., 2010. "Retail price regulation and innovation: Reference pricing in the pharmaceutical industry," Journal of Health Economics, Elsevier, vol. 29(2), pages 303-316, March.
    21. Miraldo, Marisa, 2009. "Reference pricing and firms' pricing strategies," Journal of Health Economics, Elsevier, vol. 28(1), pages 176-197, January.
    22. Regan, Tracy L., 2008. "Generic entry, price competition, and market segmentation in the prescription drug market," International Journal of Industrial Organization, Elsevier, vol. 26(4), pages 930-948, July.
    23. Grabowski, Henry G & Vernon, John M, 1992. "Brand Loyalty, Entry, and Price Competition in Pharmaceuticals after the 1984 Drug Act," Journal of Law and Economics, University of Chicago Press, vol. 35(2), pages 331-350, October.
    24. Margaret K. Kyle, 2007. "Pharmaceutical Price Controls and Entry Strategies," The Review of Economics and Statistics, MIT Press, vol. 89(1), pages 88-99, February.
    25. Economides, Nicholas, 1989. "Symmetric equilibrium existence and optimality in differentiated product markets," Journal of Economic Theory, Elsevier, vol. 47(1), pages 178-194, February.
    26. Iván Moreno-Torres & Jaume Puig-Junoy & Joan-Ramon Borrell, 2009. "Generic Entry into the Regulated Spanish Pharmaceutical Market," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 34(4), pages 373-388, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. F. Antoñanzas & C. A. Juárez-Castelló & R. Rodríguez-Ibeas, 2017. "Endogenous versus exogenous generic reference pricing for pharmaceuticals," International Journal of Health Economics and Management, Springer, vol. 17(4), pages 413-432, December.
    2. Kurt R. Brekke & Dag Morten Dalen & Odd Rune Straume, 2022. "The price of cost-effectiveness thresholds," NIPE Working Papers 5/2022, NIPE - Universidade do Minho.
    3. Kurt R. Brekke & Chiara Canta & Odd Rune StraumeAuthor-Email: o.r.straume@eeg.uminho.p, 2015. "Does Reference Pricing Drive Out Generic Competition in Pharmaceutical Markets? Evidence from a Policy Reform," NIPE Working Papers 6/2015, NIPE - Universidade do Minho.
    4. Unsorg Maximiliane, 2022. "Reference pricing systems on the pharmaceutical market," German Economic Review, De Gruyter, vol. 23(3), pages 403-421, August.
    5. Eduardo Costa & Carolina Santos, 2022. "Pharmaceutical pricing dynamics in an internal reference pricing system: evidence from changing drugs’ reimbursements," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 23(9), pages 1497-1518, December.
    6. Brekke, Kurt R. & Canta, Chiara & Straume, Odd Rune, 2016. "Reference pricing with endogenous generic entry," Journal of Health Economics, Elsevier, vol. 50(C), pages 312-329.
    7. David Granlund, 2022. "The Price Effects of Competition from Parallel Imports and Therapeutic Alternatives: Using Dynamic Models to Estimate the Causal Effect on the Extensive and Intensive Margins," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 60(1), pages 63-92, February.
    8. Kurt R. Brekke & Dag Morten Dalen & Odd Rune Straume, 2024. "Competing with precision: incentives for developing predictive biomarker tests," Scandinavian Journal of Economics, Wiley Blackwell, vol. 126(1), pages 60-97, January.
    9. Brekke, Kurt R. & Dalen, Dag Morten & Straume, Odd Rune, 2022. "Paying for pharmaceuticals: uniform pricing versus two-part tariffs," Journal of Health Economics, Elsevier, vol. 83(C).
    10. repec:nip:nipewp:06/2015 is not listed on IDEAS
    11. Katharina Elisabeth Blankart & Tom Stargardt, 2020. "The impact of drug quality ratings from health technology assessments on the adoption of new drugs by physicians in Germany," Health Economics, John Wiley & Sons, Ltd., vol. 29(S1), pages 63-82, October.
    12. Andia, Tatiana & Mantilla, César & Morales, Álvaro & Ortiz, Santiago & Rodríguez-Lesmes, Paul, 2022. "Does price-cap regulation work for increasing access to contraceptives? Aggregate- and pharmacy-level evidence from Colombia," Social Science & Medicine, Elsevier, vol. 311(C).
    13. Alice M. Ellyson & Anirban Basu, 2018. "The New Prescription Drug Paradox: Pipeline Pressure and Rising Prices," NBER Working Papers 24387, National Bureau of Economic Research, Inc.
    14. Sorek Gilad & Randolph Beard T., 2018. "Public Health Insurance with Monopolistically Competitive Providers and Optional Spot Sales," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 18(1), pages 1-10, January.
    15. Ito, Yuki & Hara, Konan & Kobayashi, Yasuki, 2020. "The effect of inertia on brand-name versus generic drug choices," Journal of Economic Behavior & Organization, Elsevier, vol. 172(C), pages 364-379.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Kurt R. Brekke & Chiara Canta & Odd Rune StraumeAuthor-Email: o.r.straume@eeg.uminho.p, 2015. "Does Reference Pricing Drive Out Generic Competition in Pharmaceutical Markets? Evidence from a Policy Reform," NIPE Working Papers 6/2015, NIPE - Universidade do Minho.
    2. Herr, A. & Suppliet, M., 2011. "Co-Payment Exemptions and Reference Prices: an Empirical Study of Pharmaceutical Prices in Germany," Health, Econometrics and Data Group (HEDG) Working Papers 11/18, HEDG, c/o Department of Economics, University of York.
    3. repec:nip:nipewp:06/2015 is not listed on IDEAS
    4. Brekke, Kurt R. & Holmas, Tor Helge & Straume, Odd Rune, 2011. "Reference pricing, competition, and pharmaceutical expenditures: Theory and evidence from a natural experiment," Journal of Public Economics, Elsevier, vol. 95(7), pages 624-638.
    5. Kaiser, Ulrich & Mendez, Susan J. & Rønde, Thomas & Ullrich, Hannes, 2014. "Regulation of pharmaceutical prices: Evidence from a reference price reform in Denmark," Journal of Health Economics, Elsevier, vol. 36(C), pages 174-187.
    6. Granlund, David & Bergman, Mats A., 2018. "Price competition in pharmaceuticals – Evidence from 1303 Swedish markets," Journal of Health Economics, Elsevier, vol. 61(C), pages 1-12.
    7. Unsorg Maximiliane, 2022. "Reference pricing systems on the pharmaceutical market," German Economic Review, De Gruyter, vol. 23(3), pages 403-421, August.
    8. Mats A. Bergman & David Granlund & Niklas Rudholm, 2017. "Squeezing the Last Drop Out of Your Suppliers: An Empirical Study of Market-Based Purchasing Policies for Generic Pharmaceuticals," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 79(6), pages 969-996, December.
    9. Hokkanen, Joni & Kangasharju, Aki & Linnosmaa, Ismo & Valtonen, Hannu, 2012. "Generic substitution policy, prices and market structure: evidence from a quasi-experiment in Finland," Working Papers 35, VATT Institute for Economic Research.
    10. Granlund, David & Yesim Köksal, Miyase, 2011. "Parallel Imports and Mandatory Substitution Reform: A kick or a muff for price competition in pharmaceuticals," Working Papers in Economics 496, University of Gothenburg, Department of Economics.
    11. F. Antoñanzas & C. A. Juárez-Castelló & R. Rodríguez-Ibeas, 2017. "Endogenous versus exogenous generic reference pricing for pharmaceuticals," International Journal of Health Economics and Management, Springer, vol. 17(4), pages 413-432, December.
    12. Herr, Annika & Stühmeier, Torben & Wenzel, Tobias, 2014. "Reference pricing and cost-sharing: Theory and evidence on German off-patent drugs," VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100556, Verein für Socialpolitik / German Economic Association.
    13. Suppliet, Moritz & Herr, Annika, 2016. "Cost-Sharing and Drug Pricing Strategies : Introducing Tiered Co-Payments in Reference Price Markets," Other publications TiSEM 4d692f0e-8577-4392-b413-2, Tilburg University, School of Economics and Management.
    14. Bergman , Mats A. & Granlund, David & Rudholm, Niklas, 2016. "Squeezing the last drop out of your suppliers: an empirical study of market-based purchasing policies for generic pharmaceuticals," Umeå Economic Studies 921, Umeå University, Department of Economics.
    15. Brekke, Kurt R. & Konigbauer, Ingrid & Straume, Odd Rune, 2007. "Reference pricing of pharmaceuticals," Journal of Health Economics, Elsevier, vol. 26(3), pages 613-642, May.
    16. Joan Costa-i-Font & Alistair McGuire & Nebibe Varol, 2011. "Does Pharmaceutical Price Regulation Affect the Adoption of Generic Competition? Evidence from the OECD, 1999-2008," CESifo Working Paper Series 3441, CESifo.
    17. Birg, Laura, 2019. "Reference pricing and parallel imports: Evidence from Germany," University of Göttingen Working Papers in Economics 362, University of Goettingen, Department of Economics.
    18. David Granlund & Miyase Koksal-Ayhan, 2015. "Parallel imports and a mandatory substitution reform: a kick or a muff for price competition in pharmaceuticals?," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 16(9), pages 969-983, December.
    19. Eduardo Costa & Carolina Santos, 2022. "Pharmaceutical pricing dynamics in an internal reference pricing system: evidence from changing drugs’ reimbursements," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 23(9), pages 1497-1518, December.
    20. Susan J. Méndez, 2018. "Parallel trade of pharmaceuticals: The Danish market for statins," Health Economics, John Wiley & Sons, Ltd., vol. 27(2), pages 333-356, February.
    21. Bergman, Mats & Granlund, David & Rudholm, Niklas, 2016. "Squeezing the last drop out of your suppliers: an empirical study of market-based purchasing policies for generic pharmaceuticals," HUI Working Papers 116, HUI Research.

    More about this item

    Keywords

    Pharmaceuticals; Reimbursement schemes; Generic entry;
    All these keywords.

    JEL classification:

    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hhs:nhheco:2015_004. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Karen Reed-Larsen (email available below). General contact details of provider: https://edirc.repec.org/data/sonhhno.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.