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Margins and market shares: Pharmacy incentives for generic substitution

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  • Brekke, Kurt Richard
  • Holmås, Tor Helge
  • Straume, Odd Rune

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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  • Brekke, Kurt Richard & Holmås, Tor Helge & Straume, Odd Rune, 2013. "Margins and market shares: Pharmacy incentives for generic substitution," European Economic Review, Elsevier, vol. 61(C), pages 116-131.
  • Handle: RePEc:eee:eecrev:v:61:y:2013:i:c:p:116-131
    DOI: 10.1016/j.euroecorev.2013.02.005
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    Cited by:

    1. 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.
    2. Pierre Dubois & Morten Sæthre, 2020. "On the Effect of Parallel Trade on Manufacturers' and Retailers' Profits in the Pharmaceutical Sector," Econometrica, Econometric Society, vol. 88(6), pages 2503-2545, November.
    3. Susan J. Méndez, 2018. "Parallel trade of pharmaceuticals: The Danish market for statins," Health Economics, John Wiley & Sons, Ltd., vol. 27(2), pages 333-356, February.
    4. Birg, Laura, 2019. "Parallel imports and manufacturer rebates: Evidence from Germany," University of Göttingen Working Papers in Economics 363, University of Goettingen, Department of Economics.
    5. Skipper, Niels & Vejlin, Rune, 2015. "Determinants of generic vs. brand drug choice: Evidence from population-wide Danish data," Social Science & Medicine, Elsevier, vol. 130(C), pages 204-215.
    6. Bergman , Mats A. & Granlund, David & Rudholm, Niklas, 2016. "Squeezing the last drop out of your suppliers: an empirical study of market-based purchasing policies for generic pharmaceuticals," Umeå Economic Studies 921, Umeå University, Department of Economics.
    7. Brekke, Kurt R. & Holmås, Tor Helge & Straume, Odd Rune, 2015. "Price regulation and parallel imports of pharmaceuticals," Journal of Public Economics, Elsevier, vol. 129(C), pages 92-105.
    8. Laura Birg, 2023. "Parallel imports under a manufacturer rebate and a price freeze: Evidence from Germany," Health Economics, John Wiley & Sons, Ltd., vol. 32(2), pages 302-323, February.
    9. Gerald J. Pruckner & Thomas Schober, 2018. "Hospitals and the generic versus brand‐name prescription decision in the outpatient sector," Health Economics, John Wiley & Sons, Ltd., vol. 27(8), pages 1264-1283, August.
    10. 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.
    11. Izhak, Olena, 2019. "Extra costs of integrity: Pharmacy markups and generic substitution in Finland," DICE Discussion Papers 307, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    12. Brekke, Kurt R. & Canta, Chiara & Straume, Odd Rune, 2016. "Reference pricing with endogenous generic entry," Journal of Health Economics, Elsevier, vol. 50(C), pages 312-329.
    13. Vogler, Sabine & Habimana, Katharina & Arts, Danielle, 2014. "Does deregulation in community pharmacy impact accessibility of medicines, quality of pharmacy services and costs? Evidence from nine European countries," Health Policy, Elsevier, vol. 117(3), pages 311-327.
    14. Aida Isabel Tavares, 2017. "Generic substitution policy, an incentive approach," Computational and Mathematical Organization Theory, Springer, vol. 23(2), pages 199-220, June.
    15. Bergman, Mats & Granlund, David & Rudholm, Niklas, 2016. "Squeezing the last drop out of your suppliers: an empirical study of market-based purchasing policies for generic pharmaceuticals," HUI Working Papers 116, HUI Research.
    16. 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.
    17. Mats A. Bergman & David Granlund & Niklas Rudholm, 2017. "Squeezing the Last Drop Out of Your Suppliers: An Empirical Study of Market-Based Purchasing Policies for Generic Pharmaceuticals," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 79(6), pages 969-996, December.
    18. Birg, Laura, 2018. "Parallel Imports and Manufacturer Rebates," VfS Annual Conference 2018 (Freiburg, Breisgau): Digital Economy 181646, Verein für Socialpolitik / German Economic Association.
    19. Matthias Hunold & Johannes Muthers, 2011. "Resale Price Maintenance: Hurting Competitors, Consumers and Yourself," Working Papers 100, Bavarian Graduate Program in Economics (BGPE).
    20. Granlund, David & Sundström, David, 2018. "Physicians prescribing originals causes welfare losses," Economics Letters, Elsevier, vol. 170(C), pages 143-146.

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    More about this item

    Keywords

    Pharmaceuticals; Pharmacies; Generic substitution;
    All these keywords.

    JEL classification:

    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology; Plastics

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