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Reference pricing of pharmaceuticals

Brekke, Kurt Richard; Königbauer, Ingrid; Straume, Odd Rune
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URI
http://hdl.handle.net/11250/162720
Date
2005-11
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  • Discussion papers (SAM) [639]
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.
Publisher
Norwegian School of Economics and Business Administration. Department of Economics
Series
Discussion paper
2005:25

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