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 phar-macies 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 .nd 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.