Price and welfare e¤ects of a pharmaceutical substitution reform

The price e¤ects of the Swedish pharmaceutical substitution reform are analyzed using data for a panel of all pharmaceutical product sold in Sweden in 1997–2007. The price reduction due to the reform was estimated to average 10% and was found to be signi…cantly larger for brand name pharmaceuticals than for generics. The results also imply that the reform ampli…ed the e¤ect that generic entry has on brand-name prices by a factor of ten. Results of a demand-estimation imply that the price reductions increased total pharmaceutical consumption by 8% and consumer welfare by SEK 2.7 billion annually. Keywords: drugs; generic competition; equivalent variation; demand estimation JEL classi…cation: D40; I11; L65 I am grateful to Kenneth Carling, Reza Mortazavi, Niklas Rudholm, two anonymous reviewers and participants in seminars at Dalarna and Örebro Universities and participants at the Swedish Workshop on Competition Research in 2009 for their helpful comments and suggestions, and to the Swedish Competition Authority for a research grant that supported the work. I wrote most of this paper while I was a guest researcher at Dalarna University and whish to thank them for their hospitality. I also wish to thank IMS Sweden, the National Corporation of Swedish Pharmacies, the Riksbank and Statistics Sweden for providing the datasets. Price and welfare e¤ects of a pharmaceutical substitution reform 1