The present paper evaluates the quantitative impact of a pharmaceutical reform on pharmaceutical prices. A generic substitution policy was introduced in Finland in 2003 to contain rising pharmaceutical expenditure. After the reform pharmacists were obliged to propose a cheaper alternative to a prescribed pharmaceutical product whenever a substitutable product was available. There were three possible channels through which the price effect might have been transmitted.

First, the policy might have affected manufacturers' pricing behaviour for existing pharmaceutical products. Second, firms might have introduced new product variants of existing drugs to the market in the form of new generics or different package sizes. Third, the policy might have affected prices through the market structure, with more firms offering new product variants entering the market.