Reference pricing with elastic demand for pharmaceuticals∗

This paper analyzes pharmaceutical producers’(of branded and generic drugs) pricing decisions in a context which combines the classical Hotelling framework (commonly adopted in the literature) with the possibility that consumers’demands are price elastic. We analyze with particular interest two commonly adopted reimbursement mechanisms: fixed percentage reimbursement (FPR) and reference pricing (RP). We find that assuming an elastic demand has a significant impact under a RP mechanism, as it allows firms to raise their prices when the copayment rate increases. Contrary to previous literature, we show that RP may be worse than FPR in terms of social welfare for suffi ciently high copayment rates. From a policy viewpoint, our results indicate that the introduction of RP is not necessarily always beneficial (compared to FPR) and thus constitute a model towards which all reimbursement mechanisms should converge. JEL Classification: I18, L13