eThesis - School of Business electronic theses

The aim of the thesis is to study how the reference price system has affected price competition in the Finnish pharmaceutical market between April 2009 and October 2010. The study explains which factors have affected prices the most and finds out whether there are certain subgroups of drugs that have similar price reactions. It is also studied whether the system has met its targets.

By using a fixed effect estimation, I am analyzing if the number of competitors, the reference price and the prices from earlier periods are affecting the price setting for the current period. The data is a panel data set containing prices and information about the product characteristics. My results show that some of the price reactions are in line with the theory and earlier empirical studies when some are not. On average, the original products decrease prices by 18% and generic products by 28% because of the reference price system. Interestingly, the prices of original drugs react less to changes in the number of competitors than the prices of the generic drugs. However, different subgroups of products with different price reactions are not reliable found since it seems that refund category is affecting more on pricing than the product characters themselves. In addition, competitors’ previous period prices do not affect the prices of the current period.

These results contradict with earlier studies. This is most probably due to the special features of the current Finnish market and the generic substitution scheme that was in force before implementing the reference price system. Despite the differences with the earlier studies, the reference price system has met the targets by decreasing the drug expenses.