Template-Type: ReDIF-Paper 1.0
Author-Name: Paul Missios
Author-X-Name-First: Paul
Author-X-Name-Last: Missios
Author-Email: pmissios@economics.ryerson.ca 
Author-Workplace-Name: Department of Economics, Ryerson University, Toronto, Canada
Author-Name: Ida Ferrara
Author-X-Name-First: Ida
Author-X-Name-Last: Ferrara
Author-Email: iferrara@yorku.ca
Author-Workplace-Name: DEpartment of Economics, York University, Toronto, Canada
Title: Pricing of Drugs with Heterogeneous Health Insurance Coverage
Abstract: In this paper, we examine the role of insurance coverage in explaining the generic competition paradox in a two-stage game involving a single producer of brand-name
drugs and n quantity-competing producers of generic drugs. Independently of brand loyalty, which some studies rely upon to explain the paradox, we show that heterogene-
ity in insurance coverage may result in higher prices of brand-name drugs following generic entry. With market segmentation based on insurance coverage present in both
the pre- and post-entry stages, the paradox can arise when the two types of drugs are highly substitutable and the market is quite pro?table but does not have to arise when
the two types of drugs are highly di¤erentiated. However, with market segmentation occuring only after generic entry, the paradox can arise when the two types of drugs
are weakly substituables, provided, however, that the industry is not very pro?table. In both cases, that is, when market segmentation is present in the pre-entry stage and
when it is not, the paradox becomes more likely to arise as the market expands and/or insurance companies decrease deductables applied on the purchase of generic drugs.
Classification-JEL: L11;L13;I12
Keywords: brand-name pricing; generic entry; generic competition paradox; health
insurance; health economics.
Length: 39 pages
Creation-Date: 2010-10
Number: 026
File-URL: http://economics.ryerson.ca/workingpapers/wp026.pdf
File-Format: Application/pdf
Handle: RePEc:rye:wpaper:wp026