Reference Pricing of Pharmaceuticals

48 Pages Posted: 26 Oct 2006  

Kurt Richard Brekke

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

Ingrid Königbauer

University of Munich

Odd Rune Straume

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

Date Written: October 2006

Abstract

We consider a therapeutic market with potentially three pharmaceutical firms. Two of the firms offer horizontally differentiated brand-name drugs. One of the brand-name drugs is a new treatment under patent protection that will be introduced if the profits are sufficient to cover the entry costs. The other brand-name drug has already lost its patent and faces competition from a third firm offering a generic version perceived to be of lower quality. This model allows us to compare generic reference pricing (GRP), therapeutic reference pricing (TRP), and no reference pricing (NRP). We show that competition is strongest under TRP, resulting in the lowest drug prices (and medical expenditures). However, TRP also provides the lowest profits to the patent-holding firm, making entry of the new drug treatment least likely. Surprisingly, we find that GRP distorts drug choices most, exposing patients to higher health risks.

Keywords: pharmaceuticals, reference pricing, product differentiation

JEL Classification: I11, L13, L51, L65

Suggested Citation

Brekke, Kurt Richard and Königbauer, Ingrid and Straume, Odd Rune, Reference Pricing of Pharmaceuticals (October 2006). CESifo Working Paper Series No. 1825. Available at SSRN: https://ssrn.com/abstract=940350

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

Ingrid Königbauer

University of Munich ( email )

Geschwister-Scholl-Platz 1
Munich, Bavaria 80539
Germany

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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