Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/193785 
Year of Publication: 
2018
Series/Report no.: 
University of Tübingen Working Papers in Economics and Finance No. 115
Publisher: 
University of Tübingen, Faculty of Economics and Social Sciences, Tübingen
Abstract: 
Constantly rising expenditures for pharmaceuticals require government intervention in firms' pricing decisions. To this end, reference pricing systems are a frequently employed regulatory mechanism. This paper considers a duopoly market with vertically differentiated firms under different competition types. Starting from the existing literature it can be confirmed that the introduction of a reference price leads to lower equilibrium prices and induces fiercer competition between firms. Further, it can be shown that reference pricing promotes generic usage and leads to an increased market coverage. Hence, an improved provision of medical supply is achieved due to the lower prices and the stimulated demand for drugs. The paper demonstrates that even under the increased demand consumer and insurance expenditures are reduced. The model isolates the mechanisms of reference pricing and shows the effects on the consumer decisions. Lastly, consumer surplus increases when implementing the regulation.
Subjects: 
reference pricing
pharmaceutical market
copayment
price cap
price competition
expenditures
consumer surplus
JEL: 
I11
I18
L51
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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