Flat rate of responsibility: what impact on the pharmacist?

Summary The objective of this article is to study the impact of the TFR on the share of the wholesaler's margin allocated to the pharmacist and on the substitution effort between brand and generic. We consider a situation in which the generic company sells its generic directly to the pharmacist and the brand company sells its originator through a wholesaler. We assume that the products are vertically differentiated and we solve a two-stage game. In the first stage, the generic company determines the share of the wholesaler's margin that it gives to the pharmacist in order to induce substitution and, if a flat rate of responsibility is introduced, the firms compete on price. In the second stage, the pharmacist chooses his substitution effort. We show that the introduction of the FIT increases the share of the wholesaler's margin allocated to the pharmacist by the generic company, but decreases the pharmacist's substitution effort.