Price and welfare effects of a pharmaceutical substitution reform

The price effects 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 significantly larger for brand-name pharmaceuticals than for generics. The results also imply that the reform amplified the effect that generic entry has on brand-name prices by a factor of 10. 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.