Expanding a Pharmaceutical Price Competition Model to Include On-Patent Drugs and Generic Competition

This paper develops a theoretical price competition model, based on the model established in Brekke et al. (2010), in order to analyze the effects of exogenous reference price regulations on pharmaceutical firms' pricing strategies and competitive decisions. Our model establishes demand schedules that represent consumer demand for generic, brand-name, and on-patent drugs under free competition and governmental regulation. Drug equilibrium prices are determined by having firms play a Bertrand game. Equilibrium prices under reference price regulation indicate that the reference price set by regulators affects the price decisions of firms. Our model concludes that a higher reference price will increase the price of both the on-patent pioneer drug as well as the brand-name drug, while the generic drug price equilibrium is not affected by the reference price.