Scandinavian Working Papers in Economics

Discussion Paper Series in Economics,
Norwegian School of Economics, Department of Economics

No 18/2010: Margins and Market Shares: Pharmacy Incentives for Generic Substitution.

Kurt Richard Brekke (), Tor Helge Holmås () and Odd Rune Straume ()
Additional contact information
Kurt Richard Brekke: Dept. of Economics, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Economics, Helleveien 30, N-5045 Bergen, Norway
Tor Helge Holmås: Stein Rokkan Centre for Social Studies, Postal: Nygårdsgaten 5, , N-5015 Bergen, , Norway
Odd Rune Straume: University of Minho, Postal: Department of Economics/NIPE, , University of Minho, , Campus de Gualtar, , 4710-057 Braga, Portugal

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.

Keywords: Pharmaceuticals; Pharmacies; Generic Substitution.

JEL-codes: I11; I18; L13; L65

36 pages, July 7, 2010

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