Does Reference Pricing Drive Out Generic Competition in Pharmaceutical Markets? Evidence from a Policy Reform

47 Pages Posted: 26 Jul 2022

See all articles by Kurt Richard Brekke

Kurt Richard Brekke

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

Chiara Canta

Toulouse Business School

Odd Rune Straume

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

Multiple version iconThere are 2 versions of this paper

Date Written: 2022

Abstract

Policy makers use reference pricing to curb pharmaceutical expenditures by reducing coverage of expensive branded drugs. In a theoretical analysis we show that the net effect of reference pricing is generally ambiguous when accounting for entry by generic producers. Reference pricing shifts demand towards generics but also induces the branded producer to become more agressive, which triggers price competition and potentially deters entry by generic producers. To investigate the counter- vailing effects, we exploit a policy reform in Norway with a gradual implementation of reference pricing across substances over time. Using a difference-in-differences approach, we find that treated substances have a sharper decline in both branded and generic drug prices and branded market shares. Despite fiercer price competition, the number of generic producers and products increases after exposure to reference pricing, resulting in a reduction of 30 percent in pharmaceutical expenditures. Thus, we find no evidence for a countervailing entry deterring effect of reference pricing.

Keywords: pharmaceuticals, reference pricing, generic competition

JEL Classification: I110, I180, L130, L650

Suggested Citation

Brekke, Kurt Richard and Canta, Chiara and Straume, Odd Rune and Straume, Odd Rune, Does Reference Pricing Drive Out Generic Competition in Pharmaceutical Markets? Evidence from a Policy Reform (2022). CESifo Working Paper No. 9853, Available at SSRN: https://ssrn.com/abstract=4169387 or http://dx.doi.org/10.2139/ssrn.4169387

Kurt Richard Brekke (Contact Author)

NHH Norwegian School of Economics - 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

Toulouse Business School ( email )

20, bd Lascrosses
Toulouse, 31068
France

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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