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Reference pricing systems on the pharmaceutical market

  • Maximiliane Unsorg ORCID logo EMAIL logo
Published/Copyright: January 14, 2022

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 highlighting the effects of a reference pricing system on prices, consumer and producer surplus, expenditures and welfare. Reference pricing decreases equilibrium prices and induces a more competitive environment. It promotes generic usage leading to increased market coverage. Especially generic consumers benefit from a reference pricing regulation. The losses in producer surplus are mainly born by the brand-name firm. Introducing a reference pricing system unambiguously increases welfare.

JEL Classification: I11; I18; L51

Appendix

Figure 6

Prices.

Figure 7

Profits.

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Published Online: 2022-01-14
Published in Print: 2022-08-31

© 2022 Walter de Gruyter GmbH, Berlin/Boston

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