Reference Pricing as a Deterrent to Entry: Evidence from the European Pharmaceutical Market

Abstract Governments that implement external reference pricing (ERP) of pharmaceuticals use prices in other countries as negotiation benchmarks to bring down the cost of prescription drugs. By doing so, they create an incentive for firms to withhold drugs from countries with lower willingness to pay. We analyze the impact of ERP on launch delays using data on drug sales from Europe. To isolate strategic delays caused by ERP from idiosyncratic delays, we develop a dynamic structural model of entry that allows for externalities in price across countries and we estimate it using a novel moment inequality approach that allows for unobserved strategy constraints. We find that without ERP delays in eight low-income European countries would fall by as much as one year per drug. Removing strategic delays by compensating firms through lump-sum transfers would cost around €18 million per drug.