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Multiple factors can explain the difference in demand for generics and patented drugs. The value of perceived quality can be considered as one of the main reasons behind purchases and the level of demand. According to Dave, Kesselheim, Fox, Qiu, and Hartzema (2017), the use of generic drugs in the US has increased significantly making then the primary option for consumers. This change has reportedly resulted in substantial savings for the health care system and the patients paying for their insurance. The prices for this type of drugs also increased recently, which implies a connection between demand and the market environment. Thus, it is possible that insufficient competition on the market of generic drugs has led to the changes in prices.
Lower levels of utilization also affected the prices of drugs, according to Gatwood et al. (2014), who noted that medications were among the goods with inelastic demand. Nevertheless, the authors also found that brand-name alternatives became less preferred in a situation of a price increase, and the use of generics is reliant on the prices of other drug types as well. Thus, some changes may be observed for medications that have cheaper alternatives, although they are very small. While more expensive brand-products may be substituted with generics, people make that choice less frequently than it was expected (Gatwood et al., 2014).
The changing prices of generics also affected the elasticity because their increase stopped consumers from switching from a preferred brand of medication to an alternative. The situation in other countries that have different insurance policies may differ from these observations. Danzon, Towse, and Mestre-Ferrandiz (2015) found that in self-pay states, the prices for different types of drugs were higher because there was no protection offered by insurance.
References
Danzon, P., Towse, A., & Mestre-Ferrandiz, J. (2015). Value-based differential pricing: Efficient prices for drugs in a global context. Health Economics, 24(3), 294-301.
Dave, C. V., Kesselheim, A. S., Fox, E. R., Qiu, P., & Hartzema, A. (2017). High generic drug prices and market competition: A retrospective cohort study. Annals of Internal Medicine, 167(3), 145-151.
Gatwood, J., Gibson, T. B., Chernew, M. E., Farr, A. M., Vogtmann, E., & Fendrick, A. M. (2014). Price elasticity and medication use: Cost sharing across multiple clinical conditions. Journal of Managed Care Pharmacy, 20(11), 1102-1107.
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