Reference

Kurt Richard Brekke (Norwegian School of Economics), Does Reference Pricing Drive Out Generic Competition in Pharmaceutical Markets? Evidence from a Policy Reform, Public Economics, TSE, December 11, 2015, 11:00–12:30, room MS 003.

Abstract

Reference pricing (RP) is intended to reduce pharmaceutical expenditures by making demand more price elastic and thereby stimulating generic competition. However, expectation of fiercer price competition may weaken generic firms' incentive to enter, potentially making RP counterproductive. In this paper we study the effect of RP on generic competition both at the extensive (number of generic firms) and at the intensive margin (generic firms' market share). To identify causal effects, we exploit a policy reform that implemented RP for a subset of drugs in Norway in 2005 providing us with a treatment and a comparison group. Using detailed register data for the period 2003-2013, we find that RP increased both the number of generic competitors and their market share relative to brand-name producers. Similar results are obtained using an alternative identification strategy based on regression discontinuity. Thus, the pro-competitive effect of RP is reinforced by increased generic entry.