Margins and Market Shares: Pharmacy Incentives for Generic Substitution
38 Pages Posted: 20 Aug 2010 Last revised: 28 Oct 2010
Date Written: July 15, 2010
We study the impact of product margins on pharmacies' incentive to promote generics instead of brand-names. First, we construct a theoretical model where pharmacies can persuade patients with a brand-name prescription to purchase a generic version instead. We show that pharmacies' substitution incentives are determined by relative margins and relative patient copayments. Second, we exploit a unique product level panel data set, which contains information on sales and prices at both producer and retail level. In the empirical analysis, we find a strong relationship between the margins of brand-names and generics and their market shares. In terms of policy implications, our results suggest that pharmacy incentives are crucial for promoting generic sales.
Keywords: Pharmaceuticals, Pharmacies, Generic Substitution
JEL Classification: I11, I18, L13, L65
Suggested Citation: Suggested Citation