Margins and market shares: Pharmacy incentives for generic substitution

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.

► Study impact of product margins on pharmacies' incentives to promote generics. ► Construct theory model where pharmacies can persuade patients to buy generics. ► Find pharmacy incentives depend on relative branded-generic margins and copays. ► Use unique product level data to compute product margins and market shares. ► Results show pharmacy incentives are crucial for generic sales and expenditures.