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Title:Reference pricing of pharmaceuticals PDF Logo
Authors:Brekke, Kurt R.
Koenigbauer, Ingrid
Straume, Odd Rune
Issue Date:2006
Series/Report no.:CESifo working paper 1825
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.
JEL:I11
L13
L51
L65
Document Type:Working Paper
Appears in Collections:CESifo Working Papers, CESifo Group Munich

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