Price dispersion of generic medications

Generic pharmaceuticals should have very little price dispersion. Economics’ Law of One Price suggests that identical goods, in the absence of trade frictions and under conditions of free competition and price flexibility, should sell for the same price, and the FDA ensures that generics are identical. In this study, we examine whether generic pharmaceuticals indeed have the low price dispersion that theory predicts, and if not, whether the dispersion seen for pharmaceuticals used to treat neuropsychiatric conditions is substantially higher than that of other drugs. Such a difference may offer an explanation for the price dispersion seen: namely, a strategy that takes advantage of buyers’ cognitive constraints and impaired ability to comparison shop. We thus assembled a list of generic pharmaceuticals and their prices using www.GoodRx.com, based on a convenience sample of the 5 most popular drugs for 10 common medical conditions listed there. Three neuropsychiatric diagnoses were used: Alzheimer's disease, depression and schizophrenia. Seven other diagnoses served as controls: asthma; diabetes mellitus-type II; high cholesterol; hypertension; osteoarthritis; osteoporosis; and urinary tract infection. For each drug, we identified the highest and lowest prices and calculated the mean, median and coefficient of variation (CV). We further calculated the ratios of the highest price to the median price and of the highest to lowest price. We found that the mean price CV was 43%. For neuropsychiatric drugs and controls, it was 61% and 35%, respectively. The mean high-to-median ratio was3.7 for neuropsychiatric drugs and 1.9 for controls. The mean high-to-low ratio was 5.9 for neuropsychiatric drugs and 2.8 for controls. In short, generic medications have high price dispersion, despite public availability of prices. Although our study did not examine why this price dispersion is present, the especially large high-to-low price ratio for neuropsychiatric medications suggests a strategy that exploits vulnerable patients.