Scandinavian Working Papers in Economics

Umeå Economic Studies,
Umeå University, Department of Economics

No 602: Uncertainty in the Generic Versus Brand Name Prescription Decision

Jörgen Hellström () and Niklas Rudholm ()
Additional contact information
Jörgen Hellström: Department of Economics, Umeå University, Postal: S 901 87 Umeå, Sweden
Niklas Rudholm: Department of Economics, Umeå University, Postal: S 901 87 Umeå, Sweden

Abstract: This paper analyzes the impact of uncertainty concerning product quality of generic drugs on the substitution behavior of prescribing physicians. It is shown that uncertainty about the generic drug quality gives the physician a value of waiting for more information before switching to the generic version. In addition, it is shown that reducing the approval requirements for generic drugs, thereby increasing uncertainty about quality, may discourage physicians from prescribing such drugs. A small empirical study supports the theoretical findings and indicate that uncertainty about the quality of generic drugs do affect physician prescription behavior.

Keywords: Pharmaceutical industry; uncertainty; real options

JEL-codes: I11; L65

21 pages, January 20, 2003

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