Endogenous versus exogenous generic reference pricing for pharmaceuticals

  1. Antoñanzas, F. 1
  2. Juárez-Castelló, C.A. 1
  3. Rodríguez-Ibeas, R. 1
  1. 1 Universidad de La Rioja
    info

    Universidad de La Rioja

    Logroño, España

    ROR https://ror.org/0553yr311

Journal:
International Journal of Health Economics and Management

ISSN: 2199-9023

Year of publication: 2017

Volume: 4

Issue: 4

Pages: 413-432

Type: Article

DOI: 10.1007/S10754-017-9216-X SCOPUS: 2-s2.0-85019252659 WoS: WOS:000413689000002 GOOGLE SCHOLAR

More publications in: International Journal of Health Economics and Management

Institutional repository: lock_openOpen access Postprint

Abstract

In this paper we carry out a vertical differentiation duopoly model applied to pharmaceutical markets to analyze how endogenous and exogenous generic reference pricing influence competition between generic and branded drugs producers. Unlike the literature, we characterize for the exogenous case the equilibrium prices for all feasible relevant reference prices. Competition is enhanced after the introduction of a reference pricing system. We also compare both reference pricing systems on welfare grounds, assuming two different objective functions for health authorities: (i) standard social welfare and (ii) gross consumer surplus net of total pharmaceutical expenditures. We show that regardless of the objective function, health authorities will never choose endogenous reference pricing. When health authorities are paternalistic, the exogenous reference price that maximizes standard social welfare is such that the price of the generic drug is the reference price while the price of the branded drug is higher than the reference price. When health authorities are not paternalistic, the optimal exogenous reference price is such that the price of the branded drug is the reference price while the price of the generic drug is lower than the reference price. © 2017 Springer Science+Business Media New York