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Price competition in pharmaceuticals - Evidence from 1303 Swedish markets
David Granlund1, Mats A Bergman2
1Umeå University, SE-901 87, Umeå, Sweden.
Journal of Health Economics
|July 15, 2018
Summary
Increased competition significantly lowers generic drug prices, with 81% reductions observed when generic drug manufacturers grow from 1 to 10. Price drops occur rapidly, with most reductions realized within three months.
Area of Science:
- Health Economics
- Pharmaceutical Market Analysis
- Industrial Organization
Background:
- Pharmaceutical markets operate under reference-price systems, influencing drug pricing strategies.
- Understanding the competitive dynamics is crucial for analyzing drug price formation.
- Previous research often lacks granular data on transaction prices and fine-grained market competition.
Purpose of the Study:
- To quantify the short- and long-term effects of the number of competing firms on pharmaceutical prices.
- To investigate the impact of competition at different levels of product differentiation (e.g., same vs. different package size, form, or strength).
- To analyze the speed of price adjustments in response to increased market competition.
Main Methods:
- Utilized panel data from 1303 distinct pharmaceutical markets over 78 months.
- Analyzed actual transaction prices within a reference-price system.
- Employed econometric methods to address simultaneity issues and isolate competitive effects.
Main Results:
- A long-term price decrease of 81% for generics was observed when the number of firms increased from 1 to 10 in highly specific markets (same strength, form, package size).
- Competition at a fine-grained level (identical products) had a substantially larger impact than competition from firms offering similar but not identical products.
- Approximately 50% of price reductions occurred immediately, with 70% realized within three months.
- Original drug prices also responded to competition, but with significantly less magnitude and slower reaction times.
Conclusions:
- Fine-grained competition among generic drug manufacturers is a primary driver of significant price reductions.
- The pharmaceutical market exhibits rapid price adjustments to competitive pressures, particularly for generics.
- While originator drug prices are affected by competition, their response is less pronounced and slower compared to generics.
Keywords:
AdjustmentBrand-name drugsDynamicGeneric drugsGeneric substitutionPharmaceutical industryPrice competitionReference priceMore Related Videos
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