Pricing strategy and moral hazard: Copay coupons in pharmaceuticals

Branded drug manufacturers issue copay coupons to compete with generics as their brands are coming off patent. To explore the impact of copay coupons on pricing and welfare, I estimate a model of demand and supply using data on sales, advertising, and copayment for cholesterol-lowering drugs and perform a counterfactual analysis to simulate equilibrium pricing with copay coupons used for price discrimination and moral hazard. Copay coupons issued for price discrimination make the drug with coupons affordable for more consumers and increase consumer welfare even when a small fraction of consumers receive a coupon. Coupons used for moral hazard significantly mitigate price competition and improve consumer welfare only when coupon penetration is sufficiently high.