ASPECTOS CREATIVOS DEL ENSAMBLE VOCAL

The distinctive dynamics of generic competition have attracted the attention of various economists. The previous empirical studies generally show that first generic entrants enjoy a substantial and long-term competitive advantage over later generic entrants (Caves et al., 1991; Grabowski and Vernon, 1992; Hollis, 2002), even charging higher prices (Grabowski and Vernon, 1992). Overall, however, there is no recent and reliable evidence of how persistent generic market shares are, and of how strongly they are affected by prices. Employing exclusively macro data, the studies identify important trends in generic prices and market shares but not the underlying factors provoking generic market shares’ persistence.

Caves et al. (1991) show that the entry of an additional generic firm depresses generic prices more severely than the price of the brand-name drug. As a result of the strong decline in generic prices, Caves et al. (1991) assert that first movers make ultimately larger profits than subsequent generic entrants, charging higher prices for a certain amount of time.

Focusing solely on the retail drugstore segment and comparing the prices and market shares of generic products over the 1984-87 time period, Grabowski and Vernon (1992) are the first to exploratively investigate the variability of generic prices and market shares. In

half of the 18 generic drug products in their sample, the maximum price observed is over 50% greater than the minimum price one year after initial generic entry. Interestingly, these firms obtained a significant market share even though they charged a higher price. Grabowski and Vernon (1992) suspect that first-mover advantages come into play. In practically all generic drug markets, the market leader is a first-mover, where the initial lead time is often not more than a month or two. Grabowski and Vernon (1992) explain that, “once pharmacies begin stocking a particular generic supplier’s product, they will have a preference to continue us- ing that product given its recognizable shape, size, and color to repeat-purchase customers”, and they conjecture that first movers will have an advantage in sustaining high market shares.

Using pooled cross-section data for the Canadian pharmaceutical market over the time period 1994-1997, Hollis (2002) examines the effect of being first or second generic entrant on firms’ sales market share within the generic market segment21_{, as measured after the first,}

second, third and fourth year following first generic entry. Controlling for the number of generic entrants, a time trend, the generic product’s price relative to the average generic price and for the average generic price relative to the pre-entry brand price, Hollis (2002) runs an Ordinary Least Squares (OLS) regression for each of the four time periods. The relative timing of entry and the number of generic entrants at each point in time are treated as exogenous. The OLS results show that first generic entrants obtain a roughly 20-35% larger market share over a period of at least four years. Hollis (2002) explains that patients’ unwillingness to switch among medications, search and “persuasion” costs on parts of doc- tors, and the administrative costs of pharmacies when stocking several generic drugs result in switching costs which in turn give rise to first-mover advantages. Providing tentative evidence of the retainability of first-mover advantages, Hollis (2002) obtains no estimate of how persistent generic market shares are. Furthermore, he ignores the simultaneity bias arising from the introduction of generic prices in the market share equation. The effect of generic products’ price on market share is insignificant except for the first year regres- sion estimate, where Hollis (2002) obtains a significant and positive coefficient. The positive effect contradicts economic intuition and casts doubt on the consistency of the OLS estimate.

Giving rise to a moral hazard problem in the market for insurance, the lack of price sen- sitivity among physicians and patients has been identified as one major explanatory factor of the historically slow uptake of generic drugs (Hellerstein, 1998; Paraponariset al., 2004), and more generally of the persistence of prescription decisions (Coscelli, 2000). Physicians are considered not to be fully price sensitive as they usually have little knowledge of actual drug prices22, and do not benefit financially from the prescription choices. Not bearing the full cost of treatment, risk-averse patients have an incentive to receive the brand-name rather than the cheaper generic drug. Both Hellerstein (1998) and Paraponariset al. (2004) assert that moral hazard in the market for health care insurance has likely hindered the surge in generic prescriptions, yet the studies do not explicitly investigate physicians’ or patients’ sensitivity to price differentials across therapeutically equivalent drugs. Hellerstein (1998) finds that physicians generally vary their prescription decisions. The reasons for why some physicians are more likely to prescribe generic drugs are largely left unexplained. Observable patient characteristics, such as age or sex, influence physicians’ generic versus brand-name prescrip- tion choices very little. Paraponaris et al. (2004) in turn show that physicians who have access to a computer, who regularly read medical journals and who collaborate with other physicians are more willing to prescribe generic drugs. In contrast to Hellerstein (1998) and Paraponaris et al. (2004), Coscelli (2000) focuses on physicians’ prescription choices among therapeutically equivalent tradename drugs. Controlling for patient and doctor attributes, she examines the tradename drug choices among six anti-ulcer drugs in Italy from 1990 to 1992. Coscelli (2000) finds a strong time-dependence in physicians’ prescription choices which she links to the persistent differences in firms’ market share. Noting that the Ital- ian reference price system forces vendors of therapeutically equivalent drugs to set identical prices, she does not account for price differentials. She further points out that pharmacists had no power to substitute generic for brand-name drugs during the sample period.

Many industrial nations have enforced generic substitution laws by now, shifting the choice over therapeutically equivalent drugs to the pharmacist and patient. Pharmacists know medical products’ prices and can inform the patient about saving possibilities. None of the previous studies investigates pharmacists’ and patients’ choice among generic products and their sensitivity to price differentials. Generic prices vary evidently not only in the U.S.

pharmaceutical market (Grabowski and Vernon, 1992) but also in pharmaceutical markets with a long-established reference price regime (e.g. Germany). An analysis of how strongly price differentials affect patients’ switching behavior among generic products will shed light on the underlying factors provoking the observed generic market share dynamics.