Price regulation of pharmaceuticals with generic competition : A single case study of the auction price model and the stepped price model

Abstract

In a free, competitive market suppliers will supply the number of goods that maximize their profit, while consumers will buy the number of goods that maximize their utility. The pharmaceutical market in Norway, Sweden and Denmark will in many ways differ from a free, competitive market, due to governmental intervention. Some aspects of the pharmaceutical market, often used to justify governmental intervention, are the large lump-sum costs related to R&D, the low marginal costs of production, the low price elasticity of demand, a principal-agent relationship with asymmetric information; the doctor is in position of more information about the good than the patient, and a physician who chooses and prescribes pharmaceuticals for the patient. This paper will consider two different governmental interventions related to the pricing of refundable pharmaceuticals, after a generic competitor is introduced to the market; the stepped priced system in Norway and the auction model used in Sweden and Denmark. The two interventions are described and evaluated against the three main goals of the Norwegian pharmaceutical policy.

The theoretical framework used in this thesis is price theory; the Bertrand paradox and the generic paradox. The thesis is based on a single case study with in-depth, semi-structured interviews done with informants representing the different agents in the pharmaceutical market, in Norway.