This article analyses the impact of the reference price
system on the price-setting strategies of the
pharmaceutical firms and on the level of generic usage.
This model is the first to take explicitly into account
the impact of the reference price mechanism on the level
of competition between brand-name and generic drugs and
national pharmaceutical spending. We consider a
duopolistic model with one firm producing the brand-name
drug, whose patent has already expired, and the other
producing the corresponding ...
This article analyses the impact of the reference price
system on the price-setting strategies of the
pharmaceutical firms and on the level of generic usage.
This model is the first to take explicitly into account
the impact of the reference price mechanism on the level
of competition between brand-name and generic drugs and
national pharmaceutical spending. We consider a
duopolistic model with one firm producing the brand-name
drug, whose patent has already expired, and the other
producing the corresponding generic version. We work in
a partial equilibrium framework where firms set prices
sequentially and consumers face heterogeneous switching
costs.We show that brand producers compensate the
decline of profits by selling greater quantities instead
of charging higher prices, thus fostering price
competition in the pharmaceutical market. This result is
a consequence of both the assumption of a vertically
differentiated model and the introduction of the
reference price system.
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