Profit-Seeking Behavior of Medical Providers and Generic Competition in the Pharmaceutical Market: Evidence from Taiwan

Abstract

Abstract Promoting competition between brand-name and generic drugs has long been recognized as an approach adopted to save on health care costs. However, there are substantial variations in the extent of the generic competition across countries. This study empirically estimates the determinants of the generic market share in Taiwan, where medical providers are in a position to profit directly from the sale of prescription drugs. Our empirical results point out that the profit-seeking behavior of medical providers plays an important and dominant role behind generic competition in the pharmaceutical market. As a result, there is a positive association between the generic-to-brand price ratio and the generic market share in Taiwan’s pharmaceutical market, which contrasts with the conventional empirical finding that the relationship between the generic-to-brand price ratio and generic market share is negative. An important implication of our study is that the profit-seeking behavior of medical providers undermines the policy effectiveness of using generic competition as the cost containment strategy in the health care market.