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Margins and Market Shares: Pharmacy Incentives for Generic Substitution

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  • Kurt R. Brekke
  • Tor Helge Holmås
  • Odd Rune Straume

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. This relationship is stronger for pharmaceuticals under reference pricing rather than coinsurance. In terms of policy implications, our results suggest that pharmacy incentives are crucial for promoting generic sales.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2012/wp-cesifo-2012-12/cesifo1_wp4055.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4055.

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Date of creation: 2012
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Handle: RePEc:ces:ceswps:_4055

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Keywords: pharmaceuticals; pharmacies; generic substitution;

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References

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  1. Kurt R. Brekke & Astrid L. Grasdal & Tor Helge Holmås, 2007. "Regulation and Pricing of Pharmaceuticals: Reference Pricing or Price Cap Regulation?," CESifo Working Paper Series 2059, CESifo Group Munich.
  2. Christopher F Baum & Mark E. Schaffer & Steven Stillman, 2007. "Enhanced routines for instrumental variables/GMM estimation and testing," Boston College Working Papers in Economics 667, Boston College Department of Economics, revised 05 Sep 2007.
  3. Coscelli, Andrea, 2000. "The Importance of Doctors' and Patients' Preferences in the Prescription Decision," Journal of Industrial Economics, Wiley Blackwell, vol. 48(3), pages 349-69, September.
  4. Raskovich, Alexander, 2007. "Retail buyer power through steering," Economics Letters, Elsevier, vol. 96(2), pages 221-225, August.
  5. Christopher F Baum & Mark E. Schaffer & Steven Stillman, 2002. "Instrumental variables and GMM: Estimation and testing," North American Stata Users' Group Meetings 2003 05, Stata Users Group.
  6. B. Douglas Bernheim & Michael D. Whinston, 1985. "Common Marketing Agency as a Device for Facilitating Collusion," RAND Journal of Economics, The RAND Corporation, vol. 16(2), pages 269-281, Summer.
  7. Nina Pavcnik, 2002. "Do Pharmaceutical Prices Respond to Potential Patient Out-of-Pocket Expenses?," RAND Journal of Economics, The RAND Corporation, vol. 33(3), pages 469-487, Autumn.
  8. Kurt R. Brekke & Tor Helge Holmås & Odd Rune Straume, 2008. "Regulation, generic competition and pharmaceutical prices: Theory and evidence from a natural experiment," NIPE Working Papers 01/2008, NIPE - Universidade do Minho.
  9. Douglas Staiger & James H. Stock, 1997. "Instrumental Variables Regression with Weak Instruments," Econometrica, Econometric Society, vol. 65(3), pages 557-586, May.
  10. Bernheim, B Douglas & Whinston, Michael D, 1986. "Common Agency," Econometrica, Econometric Society, vol. 54(4), pages 923-42, July.
  11. Grabowski, Henry G & Vernon, John M, 1992. "Brand Loyalty, Entry, and Price Competition in Pharmaceuticals after the 1984 Drug Act," Journal of Law and Economics, University of Chicago Press, vol. 35(2), pages 331-50, October.
  12. Liu, Ya-Ming & Yang, Yea-Huei Kao & Hsieh, Chee-Ruey, 2009. "Financial incentives and physicians' prescription decisions on the choice between brand-name and generic drugs: Evidence from Taiwan," Journal of Health Economics, Elsevier, vol. 28(2), pages 341-349, March.
  13. Judith K. Hellerstein, 1998. "The Importance of the Physician in the Generic Versus Trade-Name Prescription Decision," RAND Journal of Economics, The RAND Corporation, vol. 29(1), pages 108-136, Spring.
  14. David Martimort, 1996. "Exclusive Dealing, Common Agency, and Multiprincipals Incentive Theory," RAND Journal of Economics, The RAND Corporation, vol. 27(1), pages 1-19, Spring.
  15. Mats A. Bergman & Niklas Rudholm, 2003. "The Relative Importance of Actual and Potential Competition: Empirical Evidence From the Pharmaceuticals Market," Journal of Industrial Economics, Wiley Blackwell, vol. 51(4), pages 455-467, December.
  16. Brekke, Kurt R. & Holmas, Tor Helge & Straume, Odd Rune, 2011. "Reference pricing, competition, and pharmaceutical expenditures: Theory and evidence from a natural experiment," Journal of Public Economics, Elsevier, vol. 95(7-8), pages 624-638, August.
  17. Lundin, Douglas, 2000. "Moral hazard in physician prescription behavior," Journal of Health Economics, Elsevier, vol. 19(5), pages 639-662, September.
  18. Thomas Aronsson & Mats Bergman & Niklas Rudholm, 2001. "The Impact of Generic Drug Competition on Brand Name Market Shares – Evidence from Micro Data," Review of Industrial Organization, Springer, vol. 19(4), pages 423-433, December.
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Citations

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Cited by:
  1. Kurt R. Brekke & Tor Helge Holmås & Odd Rune Straume, 2014. "Price Regulation and Parallel Imports of Pharmaceuticals," NIPE Working Papers 01/2014, NIPE - Universidade do Minho.
  2. Granlund, David, 2012. "The effect of pharmacies’ right to negotiate discounts on the market share of parallel imported pharmaceuticals," HUI Working Papers 75, HUI Research.
  3. Herr, A.; & Suppliet, M.;, 2011. "Co-Payment Exemptions and Reference Prices: an Empirical Study of Pharmaceutical Prices in Germany," Health, Econometrics and Data Group (HEDG) Working Papers 11/18, HEDG, c/o Department of Economics, University of York.
  4. Dubois, Pierre & Lasio, Laura, 2014. "Identifying Industry Margins with Unobserved Price Constraints: Structural Estimation on Pharmaceuticals," TSE Working Papers 14-471, Toulouse School of Economics (TSE).
  5. Dubois, Pierre & Lasio, Laura, 2014. "Identifying Industry Margins with Unobserved Price Constraints: Structural Estimation on Pharmaceuticals," IDEI Working Papers 823, Institut d'Économie Industrielle (IDEI), Toulouse.

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