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Licensed Unlicensed Requires Authentication Published by De Gruyter November 19, 2013

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

  • Ya-Ming Liu EMAIL logo and Chee-Ruey Hsieh


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.


We would like to thank Till Requate and four anonymous referees for helpful comments and suggestions. We are most grateful for the financial support from Taiwan’s National Science Council (NSC100-2410-H001-016-MY3 and NSC101-2410-H-006-020-MY2).


Table A1:

Summary statistics of selected molecules

TherapeuticclassATC atfifthlevelMoleculesBrand nameDate ofbrandlaunchDate offirstgenericentryMarket sizeat the timeof genericentry (NT$)Numberof obs.
Table A2:

Regression results for generic market share: OLS (N = 1,780)

SpecificationOLS: Log (Generic market share)
Log (Price ratio)2.8268***3.1076***5.7989***
Log (Market size)–0.5946***–0.3555***
Global budget0.9690***0.3978**0.0829*
Therapeutic-class fixed effectsNoYesNo
Molecule fixed effectsNoNoYes


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  1. 1

    There are around twenty-six thousand prescription drugs that have been approved by the single public payer since the establishment of the NHI program in 1995 and roughly more than half of them were still reimbursed by the BNHI in 2010.

  2. 2

    For the details, please see the website of the BNHI (

  3. 3

    BA/BE generic drugs refer to the generic drugs produced by the firms that conduct BA/BE tests to verify that the therapeutic effect of their generic drugs is similar to that of the brand-name counterparts.

  4. 4

    We provide a case study of switching from branded drugs to generic counterparts after price adjustments for the molecule “flupentixol” based on the data obtained from a medical center located in southern Taiwan. For example, there is a large-scale price adjustment implemented from December 1st, 2011 onward. The price of the branded name drug “fluanxol” drops from NT$16.9 to NT$15.8, while that of its generic counterpart “pentixol” also decreases from NT$11.4 to NT$11.1, implying that the price ratio increases from 0.67 to 0.70. From the drug change list obtained from the website of the provider, there is a switch from “fluanxol” to “pentixol” in the provider’s formulary taking place on February 13th, 2012. This case provides further evidence to show that the increase in the price ratio is positively associated with the probability of switching branded drugs to their generic counterparts, thereby indirectly leading to an increase in the generic market share.

  5. 5

    The exchange rate between the US$ and NT$ was around 1:32.5 over the 1997–2007 period.

  6. 6

    Although Figure 4 shows that the price ratio rises steadily for the first 20–30 months, this ratio only increases by about 0.06, being still above 0.76. Compared to the finding that this price ratio drops to 0.4 after 30 months in the US (Saha et al. 2006), the trend of the price ratio in Taiwan remains relatively stable at a higher level for a long period since the first generic entry.

  7. 7

    Since market size is measured by the monthly sales of brand-name drugs before generic entry, it is a time-invariant variable, that is, it remains constant over time within the given molecule market. Therefore, we drop this variable in estimating the empirical model with fixed effects for molecules.

  8. 8

    Besides the price ratio, the variables for the market characteristics might also be endogenous in our estimation. Because it can be difficult to find suitable instrumental variables (IVs) to instrument these potentially endogenous variables such as the price ratio, NGC, NTC, NFS, and market size, we attempt to use the one-period lagged values and monthly fixed effects (by dropping other time variables such as PERIOD and the global budget) to take into account the endogeneity problem and re-estimate the model. The new estimates are reported in the supplementary table, which shows that the basic findings are similar to those reported in Table 3.

  9. 9

    Since the molecule fixed effects model is likely to capture the impact of the therapeutic fixed effects model, the discussion of our results is mainly based on the third specification of Table 3.

  10. 10

    The variation in price ratios will directly affect the relative profit margins between generic and brand-name drugs, leading to a change in the prescription choice between the generic and brand-name drugs, which in turn indirectly affects the generic market shares (Liu, Kao Yang, and Hsieh 2009).

  11. 11

    Because the mark-up for the specific medical provider is private information, it is difficult for researchers to obtain the mark-up for each molecule. Although the mark-up for the individual firm is unobservable, we use the theoretical reasoning to gauge its impact by linking the unobservable mark-up to some related observable variables which in turn provide the theoretical framework to identify the potential forces that shape the relationship between the generic-to-brand price ratio and generic market share. In addition, we have used the molecule or therapeutic-class fixed effect to control other unobservable factors, which in turn mitigates the omitted variable bias.

  12. 12

    Table 4 also shows that NTC has a positive impact on the price ratio, which stems from the reimbursement price of brand-name drugs decreasing more than that of generic counterparts if NTC increases (Liu, Kao Yang, and Hsieh 2012), leading to smaller profit margins from brand-name drugs than from generic counterparts. Thus, NTC has a positive impact on the generic market share because of therapeutic competition.

  13. 13

    Brand-name drugs are typically the first ones to enter their therapeutic markets, which is likely to result in larger advertising and promotional expenditures (Hurwitz and Caves 1988).

Published Online: 2013-11-19
Published in Print: 2014-01-01

©2014 by Walter de Gruyter Berlin / Boston

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