When you go to the pharmacy for aspirin, do you buy Bayer or the private-label generic alternative offered by chains such as CVS? The price for Bayer’s version is more than twice that of CVS’s, yet the active ingredient is exactly the same. The choice may seem trivial, but it provides insight into larger economic and health questions.
Research by Matthew Gentzkow of the University of Chicago — who last week won the prestigious John Bates Clark prize for the best young economist in the U.S. — and co-authors studied exactly this question. They estimate that U.S. consumers would save $32 billion a year by switching to generic labels for goods (not just aspirin) that are equivalent to their brand-name alternatives.
Gentzkow and colleagues used data from the Nielsen Homescan Consumer Panel, which gave households optical scanners to record the barcodes of all packaged goods they bought, and surveyed additional household characteristics. They found that generics accounted for 71 percent of all headache pills purchased (including aspirin, ibuprofen and related products) and 49 percent of the dollars spent on those pills.
What types of people spend more for the branded alternative, when the products are ostensibly equivalent? Not pharmacists and physicians, who are presumably well-informed about what they are buying. They were 18 percentage points more likely than otherwise similar consumers to purchase the generic version. Gentzkow’s study found that total consumer spending on headache pills would fall by 15 percent, or about $400 million a year, if all households behaved like physician or pharmacist households in choosing these products.
The interpretation offered by Gentzkow and colleagues is that you buy Bayer only if you don’t know very much about what’s in it (compared to the generic). After all, why waste your money? That conclusion is reinforced by their analysis of nonphysician households who correctly identify the ingredients in the headache pills; such households buy the cheaper versions about as frequently as physicians do.