Pharmacy Adoption and Supply Constraints
in Generic Pharmaceuticals: Evidence from Japan
Haruo Kakehi and Ryo Nakajima
Graduate School of Economics, Keio UniversityAbstract▶ We find that authorized generic (AG) adoption promotes generic substitution at pharmacies in Japan.
▶ Our model explains that the AG adoption depends on both patients’ perception and pharmacy’s cost factors.
▶ Our results inform policymakers that for-profit pharmacies play a key role in generic substitution and curbing medical costs.
Background

Empirical Specification▶ We estimate▶ Generic substitution can reduce the growing healthcare cost.
▶ Two types of generics.
⋆ Authorized generic (AG): produced by a brand company.
⋆ Other generic (OG): produced by generic companies.
▶ Consumers demand AG rather than OG. (Janssen, 2023).
▶ Can AG adoption promote generic substitution?
▶ Model both demand and supply side behavior.
▶ Take advantage of Japan’s unique practices.
⋆ Patients can purchase AG and OG with identical prices.
▶ In Japan,▶ The government periodically sets the same retail price for AG and OG.
▶ Pharmacy adopts either AG or OG as a prescription drug.
⋆ Patient’s choice sets are either (Brand, AG) or (Brand, OG).
▶ Patients prefer AG but do not know which pharmacies have AG or OG.
▶ Pharmacies are financially incentivized by subsidies for a higher generic share.

yjt = hjt yjtA += β O + β A hjt + θjA hjt + ϕθjA + τj + νjt▶

Fraction of Sample (%)(N = 5106)

AGOG
AGOG

48.78
4.34
15.70
31.15

Table 1: Pharmacies’ adoption pattern
Ownershipsmall chain individualAdoption (%)

0.4103Large chain

0.40170.3897

Table 2: AG share by pharmacies’ ownership

Fig. 1: The number of prescriptions

Model▶ Pharmacy AG adoption decision▶

The pharmacy j maximizes profit πjtℓ by choosing a drug type ℓ ∈ [AG, OG] at time t.
πjtℓ = subsidyjtℓ · njt − (fjtb + fjtℓ )Yjtℓ rjt + gjt ≥ ct

(2)

(3)

▶ Patient AG demand
Discrete choice demand by patient i after visiting the pharmacy j at time t.
▶ Patients have utility for AG and OG.

▶

UijtO = βtO + θjO + ξjtO + εOijt
UijtA = βtA + θjA + ξjtA +βtO + ξjtO + εAijt{z}|(4)

AG premium▶ We adopt the projection method in Suri (2011)
θjO = ϕθjA + τj(5)(θjO + θjA ) = (1 + ϕ)θjA + τj .
▶ Log-share demand equations are

yjtA = βtO + βtA + (1 + ϕ)θjA + τj + (ξjtO + ξjtA ),▶ Table 3 shows▶ β A is positive.
⋆ AG adoption increases generic substitution by 20.3% - 26.6%.
▶ ϕ is negative.
⋆ Patients who prefer AG do not preferOG.
▶ From equation (8), heterogeneous AGperception θjA depends on hjt .
▶ We estimate θ A for four groups.
j(i.e. Never, Late, Always, Early)

βA
ϕ
λ1
λ2
λ3
Prefecture FE
Observations

Without Covariates
0.203**(0.085)-0.411*(0.212)
1.363**(0.582)0.284(0.535)-1.364**(0.573)
Yes
10212

With Covariates
0.266***(0.092)-0.547**(0.023)1.034**(0.473)0.059(0.343)-0.943*(0.502)
Yes
10212

Table 3: Estimation results▶ Figure 2 implies▶ Always group pharmacies adopt AG
due to the positive AG perception(i.e. θjA > 0).
▶ Never group pharmacies adopt OG
due to the negative AG perception(i.e. θjA < 0).
▶ Heterogeneous AG perception θjA canexplain the heterogeneous AG adoption
among pharmacies.

Fig. 2: The predicted AG perception θjA▶ How relevant is the patients’ perception?
▶ We remove cost factor effects by the regression of θjA on cost factors
1. Management style: individual store,
small chain, or large chain.
2. Pharmacy’s size: the number of prescription.
3. Prescription share from hospitals:
2PHHospital HHIj = h=1 100 × sjh .
4. Types of prescription-issuing hospitals: small hospital, large hospital.
▶ Figure 3 shows θ A has large variation.
j⋆ Cost removed θjA also exhibits similar
pattern as in Figure 2.
▶ Who benefits from AG?
▶ Patients benefit from AG adoption(i.e. β > 0, θjA > 0).
▶ Figure 4 shows⋆ Smallest incentive for large chains.
⋆ Largest incentive for High HHI pharmacies.
▶ Uniform financial incentives may beinefficient in AG adoption.

Fig. 3: The cost removed AG perception θjAFig. 4: θjA by pharmacy characteristicsReferences & ContactyjtO = βtO + ϕθjA + τj + ξjtO

ResultsDiscussion⋆ st : the amount of subsidy⋆ Yjtℓ : generic share of antibiotics⋆ gjt : generic share of other drugs⋆ ct : subsidy threshold⋆ rjt : weight for antibiotics.
▶ The pharmacy adopts AG when π A − π O > 0 or whenjt
jt




AO(f−fc−
gc−
gjt
tt
jt
jt
jt )
AO1 Yjt ≥− 1 Yjt ≥≥rjtrjtst njt

(8)▶ Parameter of interests▶ β A : Average AG perception.
▶ θ A : Heterogeneous AG perception at pharmacy j.
j▶ ϕ: Correlation of perceptions θ A and θ O .
jj(1)⋆ njt : the number of patients⋆ fjtb and fjtℓ : cost of brand, and AG or OG.
subsidyjtℓ = st 1

where νjt = hjt ξjtA + 1 − hjt ξjtO and hjt = 1 if pharmacy adopts AG.
▶ Features⋆ (β A + θjA )hjt explains heterogeneous adoption effect.
⋆ ϕθjA deals with the adoption endogeneity.
⋆ The estimated θjA may captures both AG perception and adoption cost factors.
From Suri (2011), we use a projection θjA on hjt as follows
θjA = λ0 + λ1 hj1 + λ2 hj2 + λ3 hj1 hj2 + vj .

▶ Claims data provided by Japan System Techniques Co., Ltd.
▶ Use antibiotic generic (Levofloxacin 250mg and 500mg) approved in December 2014.
▶ Two periods panel data
▶ 1st Period: 2015 and 2nd Period: 2021.
▶ AG has a large market share, and adoption differs across pharmacies.

AGAGOGOG(7)DataAdoption Transition
20152021

1 − hjt yjtO

where yjtA = ln YjtA − ln 1 − YjtA and yjtO = ln YjtO− ln 1 − YjtO .

(6)▶ Suri, T. (2011). Selection and comparative advantage in technology adoption. Econometrica, 79(1), 159-209.
▶ Janssen, A. (2023). Generic and branded pharmaceutical pricing: Competition underswitching costs. The Economic Journal, 133(653), 1937-1967.
▶ Contact: haruokakehi@keio.jp