ESTIMATES OF THE PRICE ELASTICITY OF SWITCHING BETWEEN BRANDED AND GENERIC DRUGS

Abstract

We estimate price elasticities of switching from branded to generic drugs for two widely used drugs: Prozac and Zocor. We find the price elasticity of switching varies by drug and is between 0.01 and 0.10. While elasticity estimates for Zocor are robust to the inclusion of controls for supply‐side factors, those for Prozac are not. Our results indicate consumers in managed care plans are most responsive to differences in out‐of‐pocket (OOP) cost, and we estimate that a 10% increase in the OOP cost difference between Zocor and generic Simvastatin increases an individual's probability of switching to the generic by approximately 0.3%. This would result in a modest total savings of $36,700 among our sample of 114,218 privately insured Zocor users. Our finding that individuals are relatively unresponsive to the lower prices caused by generic introduction implies that policies targeting supply‐side behavior are likely to have a larger effect on generic uptake than price‐based inducements. If generic‐uptake did occur immediately within the first 18 months after generic introduction, the total savings among individuals and insurance companies within our sample would be approximately $7 million for Zocor and $255,000 for Prozac. (JEL I11, I18)