Price regulation and generic competition in the pharmaceutical market
2006/1: Authors: Strøm S, Dalen DM, Haabeth T, Norwegian School of Management, Frisch Centre and University of Oslo, University of Turin and HERO (PDF 503 kb)
The HERO report 2006:1 conclude that the system with index price helped to increase the market shares of 6 generic drugs and succeeded in triggering price competition in the Norwegian drug marked in the period 1998 to 2004.
In March 2003 the Norwegian government implemented yardstick based price regulation schemes on a selection of drugs experiencing generic competition. The retail price cap,
termed “index price”, on a drug (chemical substance) was set equal to the average of the three lowest producer prices on that drug, plus a fixed wholesale and retail margin. This is supposed to lower barriers of entry for generic drugs and to trigger price competition.
Using monthly data over the period 1998-2004 for the 6 drugs (chemical entities) included in the index price system, we estimate a structural model enabling us to examine the impact of the reform on both demand and market power. Our results suggest that the index price helped to increase the market shares of generic drugs and succeeded in triggering price competition.