Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

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Wednesday, June 15, 2011

Margins and Market Shares: Pharmacy Incentives for Generic Substitution

Posted by D. Daniel Sokol

Kurt Richard Brekke (Dept. of Economics, Norwegian School of Economics and Business Administration), Tor Helge Holmas (Stein Rokkan Centre for Social Studies) and Odd Rune Straume(University of Minho) address Margins and Market Shares: Pharmacy Incentives for Generic Substitution.

ABSTRACT: 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.

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