Price variability, generic substitution, market size and multimarket contacts in the Finnish beta blocker market

Abstract

The policy target of governments across European Union (EU) countries has been to encourage price differentiation and competition in markets to reduce drug expenditures. A generic substitution system introduced on 1 March 2003 in Finland has reduced drug prices, but the effects on price stability are less well known. The price variability effects of generic substitution in the beta blocker market in Finland are analysed from Q1 1997 to Q4 2007. The implications of price uncertainty and multimarket contact theory are introduced in relation to price variability analysis at the submarket level. Dynamic fixed effect panel models, augmented with the difference-in-difference method, are estimated across the product substitution groups. The estimation results imply that the size of the market reduces price variability across the markets, but the average number of firms’ multimarket contacts across the submarkets has the opposite effect. However, the effects of the change in substitution policy on price variability are less evident. The results indicate that the goal of the EU to urge governments implicitly to foster price stability in drug markets is not warranted with the regulatory frameworks currently in place, at least in Finland. We also argue that analysis of the effects of generic substitution policies must pay attention to variables such as price variability and firms’ contact space across the relevant submarkets.