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

Brekke, Kurt R.; Canta, Chiara; Straume, Odd Rune
Working paper
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URI
http://hdl.handle.net/11250/284853
Date
2015-06
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  • Discussion papers (SAM) [604]
Abstract
In this paper we study the impact of reference pricing (RP) on entry of generic firms in

the pharmaceutical market. For given prices, RP increases generic firms' expected profit,

but since RP also stimulates price competition, the impact on generic entry is theoretically

ambiguous. In order to empirically test the effects of RP, we exploit a policy reform in

Norway in 2005 that exposed a subset of drugs to RP. Having detailed product-level data for

a wide set of substances from 2003 to 2013, we find that RP increased the number of generic

drugs. We also find that RP increased market shares of generic drugs, reduced the prices

of both branded and generic drugs, and led to a (weakly significant) decrease in total drug

expenditures. The reduction in total expenditures was relatively smaller than the reduction

in average prices, re

ecting the fact that lower prices stimulated total demand.
Publisher
SAM
Series
Discussion paper;11/15

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