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Consumer Learning and the Entry of Generic Pharmaceuticals

Neha Bairoliya, Pinar Karaca-Mandic, Jeffrey S. McCullough and Amil Petrin

No 23662, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Generic pharmaceuticals provide low-cost access to treatment. Despite their chemical equivalence to branded products, many mechanisms may hinder generic substitution. Consumers may be unaware of their equivalence. Firms may influence consumers through advertising or product line extensions. We estimate a structural model of pharmaceutical demand where consumers learn about stochastic match qualities with specific drugs. Naïve models, without consumer heterogeneity and learning, grossly underestimate demand elasticities. Consumer bias against generics critically depends on experience. Advertising and line extensions yield modest increases in branded market shares. These effects are dominated by consumers’ initial perception bias against generics.

JEL-codes: I1 (search for similar items in EconPapers)
Date: 2017-08
New Economics Papers: this item is included in nep-com, nep-hea and nep-mkt
Note: HC HE IO
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