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

Abstract

Re ef fe er re en nc ce e P Pr ri ic ci in ng g D Dr ri iv ve e O Ou ut t G Ge en ne er ri ic c C Co om mp pe et ti it ti io on n i in n P June 2015AbstractIn 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, reflecting the fact that lower prices stimulated total demand.

Reference Pricing and Parallel Imports: Evidence from Germany

“…2 Whether parallel trade is induced by regulatory di¤erences, may also a¤ect the welfare consequences of parallel trade, as Jelovac & Bordoy (2005) show. Brekke et al (2015) show that stricter price regulation (in the form of price caps) reduces competition from parallel imports.…”