Price linkages in pharmaceutical markets

• Author(s): Martins, Bruno Duarte Fonseca
• Date: 2012
• Persistent ID: http://hdl.handle.net/10362/9522
• Origin: Repositório Institucional da UNL
• Subject(s): Pharmaceutical competition; Generics; Price regulation; Predatory pricing
• Document Type: Master thesis
• Language: English
• Advisor(s): Barros, Pedro Pita
• Contributor(s): RUN

Description

A Work Project, presented as part of the requirements for the Award of a Masters Degree in Economics from the NOVA – School of Business and Economics

This paper studies the existing price linkage between generics and branded pharmaceuticals, in which the generic price must be a fraction of the latter. Using a vertical differentiation model, we look at the market equilibrium, the effects on the incentives for the brand producer to develop new products, and the possibility of predation by the brand producer over the generic firm. We find that the price linkage increases prices compared to no indexation and it may increase the incentives for the brand producer to expand its set of products. When prices are freely set, the branded firm may also want to expand a new product with a higher quality, but will prefer to remove the original one from the market. Predation may equally occur in both schemes but the price linkage may give fewer incentives for the branded firm to predate while compensating losses with a new drug.