We estimate a model of drug demand and supply that incorporates insurance, advertising, and competition between branded and generic drugs within and across therapeutic classes. We use data on antiulcer drugs from 1991 to 2010. Our simulations show generics and “me-too” drugs each increased consumer welfare more than $100 million in 2010, holding insurance premiums constant. However, insurance payments in 2010 fell by nearly $1 billion due to generics and rose by over $7 billion due to me-too antiulcer drugs…The estimates of the demand and supply models allow us to perform two sets of counterfactuals. First, we show consumer welfare losses and changes in insurance payments and profits when drugs are removed from the market. Removing generics or me-too drugs leads to annual losses of consumer welfare of $125 and $135 million dollars respectively, holding insurance premiums constant. The changes in insurance payments and firm profits are more dramatic. While removing generics would increase insurance payments by a billion dollars annually, removing me-too drugs would decrease insurance payments by over $7 billion dollars annually.
International Journal of Industrial Organization