Sofia Villas-Boas, from University of California, will present "Consumer Observational Learning among Brands and Generics considering Strategic Supply in the Pain Over The Counter (OTC) Category".
Abstract: We empirically investigate the welfare effects of providing two separate information treatments to consumers about the purchase shares of their peers for generic products compared to peers’ purchase shares for the brand name products in the over the counter (OTC) pharmaceutical pain category in a field experiment. We use a bi-weekly- product-store panel scanner data set, collected before and after the field experiment, which involves displaying the two treatment labels in two randomly selected treated stores for a subset of frequently purchased treated classes in the pain category. Our controls are untreated and similar trending classes in the treated stores as well as sales in controls stores of the same treated pain classes. We first specify and estimate a demand model where consumers choose the product that maximizes expected utility among product alternatives or not buying at all. The expected utility is a function of product attributes such as active ingredients, perceived brand or generic quality, size, and price. Labels about peer rates then update agents’ beliefs and/or resolve their uncertainty about perceived quality. Demand estimates suggest that at baseline generics are disliked in the pain category. We estimate that the labeling treatment led to an increased valuation for the pain category when the label features the generic peer rate, while it had no significant effect when the label featured the brand peer rate. Second, given demand and assuming strategic supply retail pricing behavior we estimate welfare changes due to the information treatments in counterfactual scenarios. Counterfactual simulations of the treatment allowing for firms to change prices result in increases in profits consistent with more differentiation, but in losses in consumer surplus and welfare. These simulated changes are larger the more market power firms have. This study has implications for the effectiveness of mandatory disclosure requirements aiming to support more affordable and effective over the counter drug product choices.