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Consumer Learning and the Entry of Generic Pharmaceuticals

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

NBER Working Paper No. 23662
Issued in August 2017
NBER Program(s):Health Care Program, Health Economics Program, Industrial Organization Program

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.

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Document Object Identifier (DOI): 10.3386/w23662

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