The Kinked Demand model

Unlike negative and positive lists, RP does not restrict the list of available medicines for the prescriber and the patient. If the doctor prescribes a product with a price higher than RP, the patient pays the difference but there is no additional co-payment if EFP is equal to or lower than RP. 

This public financing system respects freedom of choice, subject to one s willingness to bear the additional cost. It aims to raise patients awareness of cost, thus encouraging the rational use of equivalent or similar products. In 

The RP systems currently in force differ in practice, first in accordance with the size of the market covered. This in turn depends on the equivalence criterion chosen to classify drags, and also on the inclusion or otherwise of patented drags. 

There are three levels of equivalence for classifying products, each submitted to an identical maximum level of public financing chemical equivalence, pharmacological equivalence and therapeutic equivalence. The first level entails establishing groups for the same active ingredient, which at the same time include both generics and brand-name pharmaceuticals whose patent has expired. This is the system applied in Sweden, Denmark, Norway and Spain. It encompasses bio-equivalent products with identical qualitative or quantitative composition, pharmaceutical form, dose, administration method and presentation . 

The extension of the RP system to equivalence levels 2 and 3 is far from free of controversy. A host of problems arise as a result of the heterogeneity of the effects of the drags at the level of each patient, making the system very complicated to apply. The physiological responses of individual patients to 

---

Figure 6.1 The Kinked Demand model Source. ( ) Adapted from Danzon and Liu.22...

Danzon and Liu22 show that the short-term effect of RP is to produce a kink in the demand curve at the point corresponding to the RP, assuming that all doctors have perfect information on prices. The kinked demand model put forward by these authors to explain the behaviour of prices subject to RP predicts that it will never be optimal to fix a price below RP, the optimal pricing response being EFP = RP (see box above). 

Conversely, when RP < EFP, the marginal cost for the patient is likewise zero, so the totality of the saving (the distance between RP and EFP) becomes less cost for the insurer, and therefore demand will be more inelastic after the introduction of RP. In this case, the patient s and the doctor s demand is indifferent to a price rise, as long as it does not exceed RP. D2 represents demand after the introduction of RP under the assumption that doctors have perfect information on EFP and RP prices, and shows a kink at RP. Note that in a pure kinked demand model it will never be optimal to fix a price below RP. Thus, those companies that market products whose EFP was lower than RP prior to the introduction of RP may now have an incentive to raise EFP to the level of RP. 

---