Regulation, Generic Competition and Pharmaceutical Prices: Theory and Evidence from a Natural Experiment

Posted by D. Daniel Sokol

Kurt Richard Brekke, Norwegian School of Economics and Business Administration (NHH) - Department of Economics, Tor Helge Holmas, Foundation for Research in Economics and Business Administration, and Odd Rune Straume, University of Minho - Economic Policies Research Unit study Regulation, Generic Competition and Pharmaceutical Prices: Theory and Evidence from a Natural Experiment.

ABSTRACT: We study the impact of regulatory regimes on generic competition and pharmaceutical pricing using a unique policy experiment in Norway, where reference pricing (RP) replaced price cap regulation in 2003 for a sub-sample of off-patent products. We exploit a detailed panel dataset at product level covering a wide set of off-patent drugs before and after the policy reform. Off-patent drugs not subject to reference pricing serve as our control group. We find that RP leads to lower relative prices, with the effect being driven by strong brand-name price reductions, and not increases in generic prices. We also find that RP increases generic competition, resulting in lower brand-name market shares. Finally, we show that RP has a strong negative effect on average prices at molecule level, suggesting significant cost-savings.