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Demand and Supply: Who Buys Bayer?

by Elaine Schwartz    •    Aug 29, 2013    •    805 Views

On a CVS shelf, you see Bayer and CVS aspirin. The Bayer, for 100 tablets /325 mg is $6.29 while the private label is $1.99. Each has the same active ingredients, dosage and directions.

Which one will you purchase?

It all depends. According to a University of Chicago Booth School and Tilburg University group of researchers, you are most likely to buy the private label if you are a physician, a pharmacist or a healthcare professional. By contrast, as the source of 59% of all aspirin revenue, many of us will buy the name brand.

The law of demand says people are willing and able to buy more of an item at a lower price. So what is going  on?

With data from 112,000 households during 66.3 million shopping trips, researchers divided respondents into 2 categories: general human capital and specialized human capital. After seeing who did and did not buy private label and controlling for variables like income, they concluded that specific product knowledge shapes our buying behavior. Furthermore, individuals with education beyond high school buy more private labels.

The study also demonstrated that income matters. You can see below that higher income households are less likely to buy private label products. The reason might just be that lower priced goods like aspirin have an inconsequential opportunity cost for those who are more affluent. They sacrifice little when they spend 4 or 5 extra dollars.

From: Shapiro et al. "Do Pharmacists Bur Bayer?"

From: Shapiro et al. “Do Pharmacists Buy Bayer?”

 

 

From: The Atlantic. "Why Americans Pointlessly Pay Up For Brand Name Drugs."

From: The Atlantic. “Why Americans Pointlessly Pay Up For Brand Name Drugs.”

Looking at all of us though, imagine how our spending would shift if, in all product markets, everyone bought the private label. Close to $32 billion dollars would be freed to spend elsewhere. Quickly though, the researchers warn us that more demand for generics would shift their price upward and thereby create less savings.

When demand shifts to the right, equilibrium price increases.

When demand shifts to the right, equilibrium price increases.

Sources and Resources: For more insight about why we spend more on brand names, The Atlantic and the Chicago/Tillburg paper will provide details. I recommend the topic because it does take us to healthcare costs and how behavioral economists might have some good ideas about savings.

 

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